Q2 2020 PetIQ Inc Earnings Call

Greetings and welcome to the <unk> I Q second quarter 2020 earnings Conference call.

This time all participants are in listen only knowledge a question answer session will follow the formal presentation should anyone require upgrader assistance. During the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

I would now like turn the conference over to Jeff Sonic.

I see our.

Please go ahead.

Good afternoon, and thank you for joining us on how they queues second quarter 2020 earnings conference call.

On today's call our court Christenson, Chairman and Chief Executive Officer, we control to Us President and John Newland, Chief Financial Officer.

Before we begin please remember that during the course of this call.

It 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 of 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 todays call management will refer to certain non-GAAP financial measures, including adjusted gross profit adjusted net income and adjusted EBITDA among others. 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 it.

Substitute for financial information presented in accordance with gap.

Please refer to todays release for a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with gap.

In addition, I'd like you as posted supplemental presentation on its website for reference.

Today management is conducting the call from their respective remote locations as such there may be brief delays cross dock or other minor technical issues. During this call. Thank you in advance for your patience in understanding.

Now I'd like to turn the call over to court Christiansen.

Thank you, Jeff and good afternoon, everyone. We appreciate you joining us today to discuss our strong second quarter financial results.

Before I update you on our robust sales growth strength of our diversified pet health and wellness business model and adjusted EBITDA improvement I'd like to provide an update on the cobot 19 Global health crisis, and what we're experiencing across our operations.

Susan will provide detail on our services segment and John will discuss our second quarter financial results in more detail finally, Susan John and I will be available to answer your questions.

First I'd like to express my gratitude to all our team they demonstrate incredible present reruns and agility to identify solutions in a challenging operating environment and they had like you a much stronger business that is ready to operate in any environment in the future. We're immensely grateful for our frontline employees and their commitment to providing pet parents access.

To their pet health care needs.

Our service organization use the time, our clinics were closed during second quarter to implement new safety sanitation and support protocols and are now aggressively executing against our reopening plan, which we expect to position us with 95% of our community clinics and wellness centers back in operation by the end of the third quarter.

2020.

More importantly, these procedures allow us to be confident as an essential business will be able to rein open.

We're also excited with our initial openings with early results demonstrating that we are quickly returning to pet counts in average ticket per pet inline with our numbers pre called at 19.

The product segment continued to operate with a priority of keeping our teams safe and through this commitment we were able to maintain 99% plus fill rates for our customer base, all while delivering the biggest quarter in the company's history for volume and profitability for the segments.

And our veterinarian services segment second quarter was a challenge due to all clinics being closed for most of the quarter well They limited numbers starting to reopen at the end of Q2.

Management team estimates that the second quarter impact to the services segment for these closures was approximately 26 million up revenue and approximately six and a half million a consolidated adjusted EBITDA.

Total service segment revenue for the quarter would've been approximately 29 million and adjusted EBITDA in excess of 6 million.

Recall, we continue to pay all of our associates mall stores were closed the cost to do this was 4.1 million, which was captured in the company's DNA and cost some services, but added back to the adjusted EBITDA.

We anticipate our results will be similarly impacted in Q3 due to only 5% of our clinics being opened at the beginning of Q3 with 50% open by the end of August and 95% opened by the end of third quarter I.

Assuming no further interruption for the fourth quarter, we expect your returns or revenue and EBITDA contribution inline with the prior year plus growth.

Now shifting to our consolidated quarterly financial highlights.

Even with Cobot 19 revenue impact to our service organization, we generated record net sales of 267 million an increase of approximately 21% and achieved adjusted EBITDA of 28.3 million an increase of 36%.

Demonstrating the leverage of our diversified business model and significant increase in sales of our manufactured brands.

Despite the headwinds in our service operations during the temporary closures, we remain in a healthy financial position well, we've seen increases in inventory and receivables based on strong peak seasonal demand. We continue to have ample liquidity and financial flexibility with our cash on hand cash generation and existing availability under our revolving.

The post the closing of our acquisition of Capstar.

Near term.

Team has also put in place it very conservative Capex program to ensure that we are still able to generate cash while we managed the business through this dynamic operating environment.

Taking a closer look at our product segment for the second quarter, we experienced a record 35.8% increase in sales led by our E Commerce business that was up over 50% versus Q2 last year.

Petr ECS business was the most meaningful contributor to this increase is pet parents utilize ecommerce channel to access faith and affordable health health care items for their pets importantly, we saw all of our retail partners benefit from the channel shift away from the traditional veterinarian offices, even with this surge isn't volume our distribution and manufacturing sales mix.

Has remained at 75% distributed and 25% manufactured items during the first six months or 2020.

Despite these increases in volume our facilities and still have greater than 40% excess capacity with lots of room for future growth.

Over the last few years, we've made strategic acquisitions to further diversify our business across products and service offerings as well as sales channels.

Business transformation has made Patrick you significantly more insulated, which is particularly evident during times such as this to give you a little more perspective on the health and stability of our consolidated operations in the third quarter, we believe that in a third quarter, we will see a similar dynamics in the first half of the year, where the acceleration in product sales will significantly reduce some of the financial impact.

From the services segment.

We believe our financial results also demonstrate the strength of the pet health and wellness industry and our ability to whether any changes in the broader macro economy with Ics with success dating back to the most recent financial downturn in 2008 in 2009, the pet industry outperformed the broader consumer discretionary market.

In the spirit of transparency, we're providing third quarter guidance, which John will walk through in detail. However, our 2020 I know guidance provided on March 10th 2020 remain suspended due to the uncertainty surrounding the impact on duration from the cobot 19 pandemic on our services segments to date for the third quarter are proud.

Segment sales remain robust and we are expecting minimal contribution from the services segment in Q3, as we execute on our reopening plan.

Also keep in mind Capstar seasonality is consistent product use existing flea and tick business based on the July 31st completion of the acquisition. We also have on hand inventory cap starts historical distributed product margin profile until the middle of September when we will begin to realize our more advantageous manufactured margin profile for the Capstar portfolio.

Products for Q4, we expect to be more normalized margin and contribution from Capstar.

As you look to 2021, we continue to expect incremental EBITDA contribution from Capstar of greater than 20 million and long term, we remain confident in achieving our previously stated three strategic and financial objectives.

In summary, we remain uniquely positioned in the animal health industry with our vertically integrated product manufacturing and distribution platform and an unmatched national footprint with convenient access to veterinarian services prescriptions and no Tc medications out of value.

We believe excuse mission of delivering smarter options for pet parents to help enrich their pets lives through convenient and affordable access to bedroom products and services has never been stronger as pet parents everywhere looking for ways to save money, we believe our growth demonstrates how well our complementary and diversified model is resonating with all pet parents.

We are well positioned long term to achieve our strategic and financial objectives and look forward to enhancing value for all shareholders without overview I'd like to now turn the call over to Susan.

Thank you cord.

We're really excited to share a clinic reopening plan with you today Needless to say second quarter was incredibly disruptive, but thanks to a resilient team. The outcome of this pandemic has resulted in a more contemporary and more nimble organization, which will serve us well in our next chapter of growth.

The nature of our store within a store model is advantageous supposed to us and our host retail partners, where we share on the benefit of increased foot traffic to the physical locations.

That was a simple and highly efficient model in March quickly became burdened with the challenge of it hearing district federal state and local orders as well as let us put forth by important professional associations, such as the American Veterinary Medical Association or the Vietnam.

Satisfying these fluid sets the variables with no small feat and required us to temporarily close our national network of locations on March 20.

Our objective moving forward was very clear in order to reopen as an essential business, we had to develop the system to keep our team is safe.

Our retail partners team safe and our pet parents shape as well.

The Great news is that we had the team in place to work through the challenge in a systematic fashion with our retail partners as we piloted and identified solutions.

Beginning in May we started reopening our wellness centers and last month, we started piloting select reopenings have our community clinics as well.

As you can imagine maintaining social distance is that the utmost concern.

Well then most of our wellness center formats, we have the luxury of having an independent entrants isolating our operations from those at the retail partner, which became highly advantageous and allowed us to reopen those locations more quickly.

However, within the community clinic format, we are operating within the store in a pop that fashion, which created it added operational complexity.

That's required us to work closely with our retail has partners to develop line management systems that how pet parents comply with social distancing requirements, all while still delivering fast efficient and friendly veterinary wellness services that are pet parents are accustomed to.

In terms of the reopening status in both of our formats today, approximately 60% of our wellness centers, our operational with the goal of approaching 95% of our network to be operational by the end of the third quarter of this year.

These percentages exclude the 27, while the centers that were under construction prior to the covet 19 pandemic.

Well construction on these have since been completed their being targeted for their grand openings during the fourth quarter of this year.

On the community clinic side, we began piloting select clinic reopenings at approximately 5% of the network in July to past, our new operational protocols alongside our retail partners.

These tests are going well and as a result, we currently expect to reopen approximately 50% of our network by the end of August with a goal of at least 95% reopened by the end of the third quarter at this year.

The combined effort is highly organized and structured around localized requirements. So that we can get back to business.

But do so went away that satisfies the needs of all of our constituents with a safety first mentality.

What's more the strategic investments in our Labor force through this period are paying dividends the employee turnover rates are down to 2%.

A greater than 50% decrease from what we typically expect and our staff is ready to get back to work.

The response from a pet parents has been immediate we've experienced a groundswell to support from pet parents seeking us out calling their local retailer and asking us to get back to business.

We are incredibly grateful for their loyalty.

For the clinics that have reopened we've seen an incredible left in our pet counts and average ticket to the levels that surpass our pre government run right.

Both of these are incredibly encouraging metrics for our business and speak to the pent up demand in the industry for veterinary services.

However, we believe there even larger forces at play which put us in an advantageous position in today's market place.

According to the recent survey by the American Pet products Association or the A.P.T., a 55% of all respondent pet parents are quote unquote very concerned about their finances over the next year and 42% of the surveyed say that could 19 has had a significant financial impact on there.

Household.

We already knew pre pandemic that pet parents believe their biggest challenge and caring for their pet what's the cost.

Today, the data and the demand tell us that challenge and that concern is only exacerbated.

There's no denying the bond between pets and pet parents, but in this kind of heightened uncertainty pet parents are seeking out solutions for affordable veterinary care and increasing rates and pet accuse national network of convenience and affordable clinics are the perfect solution to meet their needs.

We are extremely excited about our leadership position in the market the strength of their relationships with our host retail partners.

Team, we've put in place and the years of gross that lie ahead for our business.

With that I'll pass the call over to John.

Thank you Susan we demonstrated the diverse and resilient nature of our business and second quarter were able to produce strong consolidated results were 21% net sales growth and 36% adjusted EBITDA growth versus prior year. Despite the lack of contribution from our service segment due to the covert 19 is temporary.

Closures of our National Clinic network.

Our product segment carried us through the quarter in generated strong sales growth of 36%, which was an acceleration from the 32% we posted in the first quarter.

The growth we experienced in the second quarter was a continuation of the themes that we spoke about during their first quarter call.

We saw heightened consumer concerned around and demand for essential pet health and wellness products amid the disruption the widespread closures of the traditional veterinarian channel and shifts in retail purchasing habits due to social dispensing and local stay at home orders more recently, we're seeing trends normalize to an extent.

As access to products has improved.

And consumers become more custom to their new normal.

Nonetheless, the financial strength that our product segment provides our broader business is an important component and the resilient nature of pet I Q.

Particularly in an uncertain environment like we face today, the three strategic acquisitions, we have completed in the last three years have been highly complimentary and provide us the flexibility to maintain a long term view, our strategic and financial position.

In fact, despite the temporary headwinds we face in our service segment, we were able to largely mitigate its impacts due to the variable nature of the services segment cost structure and deliver relative margin stability on a year over year basis.

We view this as a key accomplishment given our estimates for loss contribution from our services business. What's your products, which is approximately 26 million and then sales at 6.5 million in adjusted EBITDA for the quarter due to its temporary closure.

Based on these estimates the services segment net revenue and adjusted EBITDA for the second quarter of 2000 clay would've been approximately 28.7 million a 7.6 million respectively.

Distances, some specifics around second quarter financials consolidated net sales increased 21% to a record 267 million due to strong sales contribution from our product segment, which was driven by or Parago animal health acquisition and ongoing success with our progress prescription drug program at ecommerce partners.

Second quarter gross profit increased 21% to 42.2 million gross margin was consistent with prior to the prior year period to 15.8%, even as a company experience an estimated 200 basis point headwind and that temporary services seven closures due to covert 19.

Adjusted gross profit was 47 point Threemillion and adjusted gross margin was 17.7% for the second quarter of 2020 when costs associated with a temporary services segment closures are added back.

If I lost margin from these closures was also included adjusted gross margin would have been 19.8% finally, adjusted EBITDA increased 36% the 28.3 million, which we think is a great accomplishment in this environment and considering the circumstances surrounding their services.

At the segment level or product segment net sales for the quarter were 264.5 million an increase of 35.8% here over here.

Segment adjusted EBITDA before corporate allocations was 41.9 million, an increase of 98% compared to second quarter last year.

Consistent with recent trends our E Commerce channel experience disproportionate growth and our manufacturing business continues to perform to our goal of 25% sales growth do this success, we're having integrating our brands such as pet armor into our customer network combined we realize a nice gross margin lift when come.

And with a fixed DNA and the product segment, we were able to generate healthy operating leverage which is a primary driver for the strong growth of segment adjusted EBITDA.

Within our services segment net revenues were 2.7 million compared to 26 million in the same period last year.

Accordance isn't discussed due to the covert 19 related temporary closures of the service locations. The company generated nominal revenue during the quarter, which primarily represents revenue from the online reorders by our pet parents are reported services segment. Adjusted EBITDA was 1.1 million, which compares to 6.8 million.

In the second quarter of 2019.

As it pertains to our balance sheet in liquidity or long term debt balance, which is largely comprised of our revolving credit facility fair involved in convertible debt was 357.8 million as of June Thirtyth 2020.

Pro forma for the company's $95 million acquisition of Capstar. The closed on July 31st we had total liquidity of approximately 100 and 202 million.

I'd note that we have an additional 15 million available via an accordion feature the credit agreement for a total of 117 million of available liquidity.

From a cash flow perspective, we generated 26.2 million of cash flow from operations. During the second quarter working capital increased 146.5 million for the year to date period ended June Thirtyth 2020 versus prior year, primarily due to the 123 million of net proceeds from my convertible note offering.

We are turning inventory rapidly the filling reorder sufficiently.

Let's see little evidence of excess channel inventory, we remain confident that working capital were reversed.

And provide cash to the business in the second half of the are falling than normal seasonal cadence when combined with our available liquidity the consistent positive contribution from our product segment and the temporary reduction of Capex as we pause there clinic growth rollout, let's come back here in a position and drive free cash flow and build cash in the quarters ahead.

We're not providing full year 2020 guidance at this time due to the uncertainty surrounding the impact and duration of the covert 19 pandemic on our service business. However.

We are providing the following range of expectations for the current fiscal third quarter ending September Thirtyth 2020.

Consolidated net sales are expected to be in the range of 160 to 170 million consolidated adjusted EBITDA is expected in the range of 15 to 18.

Guidance assumes continued growth within our products segment, but minimal contribution from our services segment as we execute the reopening plan during the quarter third quarter guidance also assumes minimal contribution from the caps or acquisition closed on July 31st 2020, due to the seasonality that's consistent with our existing flea and tick business.

Additionally, I'd note that we're carrying on hand inventory capstar at our historical distributed product margin profile until the middle of September when we first realize the advantageous manufactured margin profile for this portfolio of products that are now under the company's ownership.

Following this third quarter transition, we expect normal margin contribution to sue for the Capstar products, which is the basis for a 20 million EBITDA estimate for fiscal year 2021.

[noise] closing.

We're very pleased with our second quarter, 2020 results, which demonstrates our ability to navigate even the most difficult circumstances in fact.

They stuff is a commentary you've heard from cordon Susan there's evidence, suggesting that we are emerging from this disruption and then even stronger position with broader capabilities to bring convenient and affordable pet wellness products and services to pet parents and the formats that best fit their life.

With that overview cord, Susan and I are available for your questions operator.

Thank you.

We'll now begin the question and answer session to join the question Q You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if you're using a speakerphone. Please pick up your handset before pressing the kids to withdraw your question. Please press Star then too.

It will pause for a moment as call there just trying to Q.

First question is from Joe Altobello of Raymond James. Please go ahead.

Thanks, guys good afternoon.

First question I guess I'll start with the guide for Q3 the sales number.

160 to one.

If I look at your third quarter last year, you did product sales.

161 or the Hal.

So it would seem like it implies a pretty significant slowdown on the product side from a revenue standpoint, maybe give us a little more color as to why you're expecting that slowdown in the third quarter.

Yeah. This is John Joe that's a great question.

And just remind everyone that are suspended guidance for the full year had us at 800 million 11 in 80 million in earnings.

Prior to cope with our original guidance for the quarter would've been approximately 200.

$10 million in revenue for the quarter.

So lets bridge that gap of so well we are no 160 to 170 range versus the 210 [noise].

Yeah, we're going to have a 30 million dollar impact to sales for close clinics and clinics that we haven't opened to the first half of the year. Additionally, we have $15 million of the potential impact the cells from our online retailers, but they've message that their purchasing of eight weeks of on hand inventory was based off of code.

[noise] consumption rates.

The good pet potentially slow down based on the settlement of the Mark.

Yeah. Joe This is court I think to expand even further to John's point within the last week. We've had a few other online retailers, let us know that they've continued to buy inventory based on growth rates. We saw during the second quarter that were extremely high as a veterinarian market has reopened every stabilize they've consumption.

At those places has gone down still better than what we expected it for the year, but definitely less than what it was they bought inventory to support the higher growth rates. Again. This is something we are 100% confident it will happen, but without messaging, we're being more conservative and so there is likelihood another $15 million to $20 million or product revenue.

It would flow through that but we're essentially tracking with those two minor issues I guess, what the original $210 million revenue number would have looked like.

Okay. So it sounds like long story short you're looking at what did have a pull forward.

From the from the third quarter to the first half.

I think it's something that wouldn't be it normally classified as a pull forward, but in this and the spirit of just normal projections in forecasting buying your inventory to continue the rate of consumption that was there.

Gets you to where eight weeks of inventory is very different they've had returned back to something slightly better than what what was pretty covance. So still very strong consumption going out and being shifted a consumer but purchasing against what the rate was we saw at the peak of Covidien second quarter gave them to be a position, where we likely believe in August and stuff.

Remember, you'll see some correction on inventory levels that will impact fell slightly in the third quarter.

But again returning to normal run rates and normal consumption wants that onetime kind of reset is done.

That's helpful cord, and maybe secondly, all your distribution contracts.

Some of your third party manufacturers can can you give us an idea of how.

What's the cadence of.

Of renewals our fourth for this year and maybe early next year.

Yeah, we are tracking with no open issues right now with either one of them. We are in discussions about modifications are being made for next year, but remember right now those contracts run through next year. So we're in pretty preemptively pushing to get things done to extend further but right now no perceived or projector risks to those discussions.

Okay, great. Thank you.

The next question is from David Westenberg Guggenheim Securities. Please go ahead.

Hi, Thanks for taking the question and congrats on a good Q2 I think this question is probably a little bit more for Susan or what are kind of the puts and takes for on the timing for opening if you can get into that a little bit more and maybe this one's for quarter, John and continuation of that if you do you have to control. A line is there any amount of people that can be inside.

Clinics at a time do you and I expect impacts in terms of what the margins are a ness and you know I mean, they maybe just goes on tell the vaccine is is out there. So I'm. Just wondering you want to get kind of an assad on margin impacts as these open up to maybe less consumers than normal.

Hey, David It's too then I'll talk to you just a little bit about our reopening strategy as you know when we spoke last time, we started with her wellness clinics that have had the independent on trends from <unk> with our retail partners. It just from a safety standpoint was a it was a much either.

Your approach to get to get out the door with those from there we moved into additional wellness centers that didnt have an independent door and we needed to do that with a line management system. As you can probably imagine neither up nor our retail partners want lines to form inside their stores and so we put.

A a had a process in place well basically pet owners can virtually line up and that allows them to walk around walk outside with their pets, while they're waiting for their veterinary services. Once we had that put in place. We then opened up some additional wellness centers that did not have that independent door.

And then obviously lots we had that line management system test. It improves then we started to move into the community clinics, because a community clinics or wiki, where we can get some very long lines and it was important that we'd be able to manage those so with all of the that testing that piloting under our belt over August September we will be opening up.

Our 37 community clinic field offices will be doing that and waves based on size and I think it's based on location around the country.

Got it now that's a that's very helpful and then on Oh God.

Hey, I've got the second question, Dave I think Susan's point, we obviously like everyone anticipated it'd be more clunky took place but people to the clinics with all the new procedures in place and all the new things going on as it related to continued operating that.

Did during the time, we were closed put in place a line management piece of software and technology, we've been opening up a number of clinics both in the wellness Center and the community clinic formats, and you can imagine with the pent up demand of being closed for some time period, we've actually seen big clinics have throughputs well in excess to what we were seeing prior to.

And as we get into the weeks. After those first couple of weeks of the pent up demand we're normalizing at rates virtually exactly in line. What are we were pre covert both from a ticket and from a quiet pets treated and so at this point, we're projecting no impact to the change in procedures, our ability to take care of the number of pets that we're treating previously and then.

With our revenue expectations out of the stores.

Got it now that's that's very helpful.

Thank you and then in terms of Tele medicine I realize it's it's very early and not a revenue contributor when do you think that could become a a revenue.

Contributor and do should we think about this is been cannibalistic are additive to the services you have right now.

Yeah, Dave I definitely expect for it to be added it to add to our business I think that people will reach out to us more frequent frequently versus putting their pedal to the card and bringing them to clinics. So I definitely see it as being additive I can tell you right now that through our Tele health system, we take about 200 calls a week.

And by the way this is really still in a piloting phase where we have not gone out and we'd not promoted this extensively to the marketplace. So this is just this is very initial first blessed and as you know those those calls or manage through our telotristat process with our partners at Western Docs, if they haven't.

Team of technicians are available 24, seven to answer questions I'm, we piloted tele medicine in three states I think that we talked about this previously I'm in Michigan, Florida, and Georgia, our expectation is to continue to evolve our process for learning a lot and as we develop this process around those three states, but our expectation is that.

We'll roll out additional states throughout the rest of this year.

No I appreciate his artist Oh God, Okay, but I was just can add with Susan's comments that you know the 200 calls a weaker that's I'm very limited availability of the tele health and tablets reauthorized programs across the market where by no means a full distribution. So the response has been fantastic for the limited states that we're operating in.

We are to place now or we can generate revenue using it and we think we're going to see significant upside in the performance. There was we look at taking our average.

Revenue per household per pad up we think signet believe I see in multiple visits where it's a way for them to get to us easier for that second or third consultation. We also have been in the process of launching a rolling out our subscription program for our wellness plans and we think that having medicine, tele health and tell us Riyadh and telematics as part of those program.

<unk> is going to allow us to have a higher close rate higher retention rate and just be a better partner to our pet parents. So it's early in the game, but I will tell you we're way out in front in the work that we're doing in the resources, we've dedicated to the Tele health platform and see nothing but a very bright future that we'll continue to be more accretive in the futures, we get into more markets and as the right.

Oh, sorry environment becomes more supported which we definitely feel like will happen.

I appreciate that night, I I've kind of haagen, a little bit of questions just want to ads that one more in terms of have you been able to sell wellness plans on online during this or I'm just trying to think about during this closure, whether or not we could be seeing a little bit of stream of extra services because while this has been something now that you've been interested or trying to push for.

Yeah no. So during the time that we were closed we were not online selling our wellness services, but at the <unk>. The wellness plans, but we are backed up and running with them and they are selling so we basically relaunch those again as we've started to reopen these clinics I think interestingly to Dave.

Is that what we're finding is that interestingly the pet parents that are coming to us today are disproportionately coming to US also because as a minor illness issues, which tells you that they're they're truly is pent up demand out there because people have stayed at home at their pets. So a lot of what we're seeing right now.

People that I've spent a lot of time at home with their pets.

You know noticing that years, the eyes, yeah, and literally bringing them ends for some of those additional services that maybe previously had they been working with their pet at home all day I would've never notice these types of conditions.

Good.

The next question is from Kevin Grundy as Jefferies. Please go ahead.

Hey, Good evening guys question, probably for core <unk> I wanted to come back to the guidance a couple of questions on revenue and then.

And then one on margins. So court can you share or what you think retail take away is at this point. So we like it seems like organic growth in products was roughly circa 20% based on your guidance given that you're going to get a minimal contribution from services. It seems like it will be up modestly. So you know kind of add.

Bridging those two you get a up low double digits is that how you guys you're thinking how you're seeing retail take away at the moment and if you do get a return to that growth rate is that where you kind of level setting expectations for for Q.

Yeah, I think Kevin if you look at the company and you listen to the messaging, we've given your relative to impact to the sales or are the services organization.

We're tracking right now to have an excess of $50 million of revenue impact to the service organization during the closure.

And if you look at the product performance first half year, plus what we're talking a back half of the year, where normalizing to a place that we would have been in line with kind of our 815 plus from a from a revenue perspective, and I inline with what would be the normal kind of lift we would've been messing for the full year.

Theres still a lot of unknown as some of the cobot impact in purchasing is is isn't necessarily a clean linear line that happens across the business and so we're doing the best we can't what we do knows we're having a great year that we're going to be up that's a business is performing grade that's a pack counts and tickets are going back quickly to where we're confident we would have been.

Able to be ahead of our guidance. We gave originally we suspended.

That's a that's a good place to be when you're talking about being confident coming into next year. They I think I would remind you in Q3 of of last start. This last year, we had the full impact of the Parago acquisition, and where we didn't have it in the first half of the year.

So we are anniversary and some of those numbers plus some of these oddities in the product business relative to the product business, but I think where are you all in all when you normalize it all out we're tracking in line very close what we projected for the total year and where we would have normally band and we think that will normalize to something that feels like that.

Okay.

A couple more quick ones for me just related to record the slowdown that your online retailers. Our messaging to you are you seeing that in other channels <unk> with respect to products and if so why do you think that is.

Yeah, Kevin were not and I mean literally the impact is the the online consumption at the peak of the business was running at you know two to three and sometimes four times in certain categories of what it was running pretty cold it at the peak.

It's gone back to where it's running 15 or 20% better than what it was pretty cold, but when you have some categories are running 100%. They were buying eight weeks of inventory expecting that type of consumption and so once you normalize that backwards still gonna be running growth rates better than what we had projection for the year on that channel and we expect that Charles I continue to run those type of type of growth rates.

I think in general we've seen across most categories.

And the times, we're in right now, especially brick and mortar retailers that.

Our stronger and been more important during the cold it environment, we've seen their numbers being very stable to slightly up.

And then some of the retailers into some of the specialty categories, how about traffic that it's been more impact and haven't performed as well, but there's no doubt that the growth today is skewed towards the online retailers in this environment, but in total were still seeing strong retailers delivering good numbers. They did not have the same drastic increases so they don't have the drastic correct.

And to get back to that six day weeks of inventory they like to hold so.

I think I do think its onetime in nature Kevin.

Okay. Thanks, working that a quick one for me I'll pass it on so John on the also on your third quarter guidance at the midpoint. It implies your EBITDA margins are down 50, Bips a year over year can you just walk us through like sort of tumble through the numbers to get US. There you clearly going to have a drag from services, but capstar should be nicely agreed.

If you talk a little bit about channel and product mix dynamics that lead to do some margin compression in the third quarter and then I'll pass it on bags.

I tell you what Kevin what I'm wondering how I'd like to start. This is is to give you to take you through the full a walk down of the EBITDA Bridge you know when we talked about the guidance you know had said.

That previously.

You know we had expected to have approximately 210 million in revenue in 22 million in earnings for Q3.

So when we bridge that and we look at.

A few taste just take the middle of the guide.

We've provided a 15 to 18 of 16.5.

The impact to EBITDA on the clinic closures for Q3 is 6.5 million right. So.

[noise], then, let's let's breakout or all of the Capstar contribution as well.

Apstar traditionally in a third quarter. So if you look towards next year, you should expect to see of approximately $6.5 million of EBITDA contribution for Capstar.

This year based off of the timing of when it was completed and the fact of of our on hand inventory that includes the previous margin structure really going to see about 1 million of contribution of that this year. So next year there would be you know.

An additional you know $5.5 million of.

Of earnings associated with that so the bridge is if it was on a normalized basis, you would see something that looked a lot more like $28 million.

The associated with the $210 million <unk> of revenue.

So we didn't get the.

We expect expected or.

A contribution from the cap sorry, just based off of the timing of when it was completed in there on hand inventories, but you should expect to see going forward, a higher EBITDA percentage associated with having that as part of our portfolio of products.

Okay. Thanks, John I'll pass it on.

The next question is from Bill should tell US Trust. Please go ahead.

Hi, good afternoon.

He Oh I'm sorry to go back to this but just want to maybe he'll be on the bridge on the third quarter product sales I mean, if you were doing you Didnt hundred 62 million last year and you growing your kind of 15% rate could see that 186, what would be normal for September quarter, if I'm bridging.

That back down to the 160 to 170 are you seeing kind of.

15 to 20, Oh, sorry, 10 to 15 was just showed up in the June quarter. In the rest was just sales you would've gotten through your services channel that just isn't showing up is that the right way to look at it.

Yes, that's what I would have looked at it we third quarter, obviously planting season stops significantly inventory start reducing its a huge contributor to our growth.

Heartwarming other ones also fall off so we always have seen a they.

Softer growth rate and the products business in Q3 as those inventories are are brought down. This year. We have the anomaly of what are we just described to the Rx business and that right rightsizing their inventories and getting that that impact to the quarter. So Q3 has always been a tougher quarter year over year from.

Versus like a Q wandering Q2, where we're really low near those other categories that are been growing significantly and continue to grow for us, but again the annualized growth rate I think is gonna be right, where we would expect it to be.

And what you're seeing in kind of this earlier sales, it's largely Rx not LTC.

It's yes, largely rx you'd be when there is some low to see but largely Rx, where you had virtually all veterinarian offices close in anyone the need a prescription fill it was online but like I said, if if they were projecting the wrong, 25% increases year over year Rx ran 100% increases for at the peak.

And it's now running better than the 25% originally projected but nowhere near the 100 and so it's just a rightsizing of the inventory.

Got it and then Susan I don't I don't need to be.

Armchair quarterback and it's certainly a difficult situation, but why are you taking so long to reopen everything I mean tractor supply stores never shut down.

A lot of pet stores or around the country or back up and running the even the Walmart <unk> is opening as a separate entrance. So.

Is there a hesitancy from your beds to to get back is there something else. That's a gating factor I'm just kind of surprised that they did you were kind of expecting limited contribution in the third quarter from that business. It seemed like we should be it further along.

Yeah, I noticed I think it's a it's a it's a good question Bill and I think that it comes back to.

First of all being able to open up a safely and keep our teams safe to keep our a retail partner or partners team space as well as pet parents as well too so we needed to get the appropriate protocols in place north and be able to do that there's there's no hesitancy whatsoever on our side or on our retailers side, but we have.

We work as as best as we possibly could together to develop plans to get these clinics back up and as I mentioned earlier, the our retail partners are actually receiving phone calls from our pet parents looking for us to get back open, but we also know that managing those lines is incredibly important so I think that that.

Once we got this line management system in place that actually helps us to be able to manage it without putting multiple additional people into the into the clinic to be able to manage it. It was a solution that that needed to be developed and it was a solution that is definitely up in <unk> and absolutely ready.

Good to go community clinics, where the biggest challenge wellness clinics not so much because you have the ability to manage the number of people that actually come into the clinic.

But but the wellness they are community banks, if you remember, we get lines and that and I'm, telling you that post I put that post coming out of this this pandemic and we are seeing 50 and 60 pet parents.

In a two and a half hour time period, so I'm not talking about a small number of people being able to manage that and being able to manage the distance, saying is incredibly important and again, we do that hand in hand, with our retail partners. So where we are actually very proud to have the success rate that we've had and our ability to get these back up and running and they will have all.

These locations backed up and running by the end of September.

Bill the other thing I would add two years as we work with the region, but we'd <unk>.

Sorry about catch up.

Hi, Good. Please go ahead.

I'm, just gonna say as we work closely with our retail partners. They are really the negating factor, we're ready and can open up much quicker than what they are but I will tell you that the procedures in the processes in the operational reviews, we've done with their senior leadership up. The Ceos are these company is why we've been very strong the language that when we do reopen we won't close there.

Incredibly impressed with the what we've put in place that we're ready to go and now that there through the tough diligence period of being ready, let other people operating their store environment again open arms at this point getting back to 95% by the end of Q3. It in quantity is more than we expected I've open at that time period, maybe not as fast we want to get.

There, but the fact that we're going to end Q3 with 95% reopened as well ahead of what we were estimating prior so we actually would love to have gotten more done everything that is controlled by out of the then controlled and we now have all of our partners in a place where they're with us driving the process forward and we will get back to full revenue contribution of very soon.

The other item that I would add that was that in a two month in a two month period of time will have 2700 locations up and running and that's doing that in a two month period of time.

Got it thank you.

Thanks Bill.

The next question is from Jon Andersen of William Blair. Please go ahead.

Hi, good afternoon everybody.

Hi, Josh on the.

Hi, Hi.

First question is just on the.

95% target.

For.

Service capacity by the end of the third quarter.

When you think about the clinic side of the business the community clinic.

This does the 95% does that represent clinics themselves or the number the locations that will be open because right. You you run multiple clinics in a given location. So I'm just trying to understand and that's outside of the business what the 95% represents.

Yeah, John that the 95% represents the number of clinic.

Yeah. So we will have all that 95% of locations open returning to their normalize schedule frequency, so being able to what we believe get back to 95% of revenue I'm at that point. So were again, so far so good the indication as the pet parents are coming back at rates that we'll be back to those rates, but we.

Going back to our normalized schedule for the time of year that we would be in that store and we should be returning back to normalized revenue.

Great that's super helpful.

On the.

How do you parse the pent up demand.

That you're seeing versus maybe ongoing demand have you had wellness centers are open long enough now that you can kind of thought see the difference there between the pent up and what you suspect will be kind of the ongoing.

Yeah. It's we believe that what we're seeing is a combination of two different effects that are happening I'm first of all that pent up demand and I think interestingly when I mentioned earlier the minor illnesses that we're seeing and people are spending more time with their pets and they are noticing that it's funny or does the Ronnie sunny.

It appears in the runny eyes, and things of that nature and so so number one there is pent up demand, but as pent up demand because they've not been able to get these conditions seen are these conditions, taking care of so they're coming in if they're not coming in necessarily to get their vaccination, they're coming in to get issue is taking care of so so we like.

Believed that those those clients will continue to come back to us even for the basic services, but I think also back to my other point about the pet parents being disproportionately impacted by covered 44% of our pet parents to date and I'm talking about since we have reopened our people we've never seen before that's 44%.

That that tells me that yes, we're dealing with pent up demand, but we're also dealing with a pet population our pet audience that quite frankly is looking for affordable services.

Interesting so 44% there are our new new use annually.

I've never been to see it.

And John Weve, that's been a number that's been similar to our past that we track to see what the percentages are and that's in the range of what we've always seen we're just seen any significant increasing quantities. So that 44% represents a much larger number we do have our existing patients that are in our data base and we're looking at those and yes people that we didn't get to see for those couple of months maybe.

The those have doubled up where you've seen a person that normally comes in April now has come in July.

And were able to track that they'd came every year and so we're able to see that that person, how we're going to recover some of that revenue as well, but we feel very good that we're going to be able return quickly that we're not going out of the slow build back to our pet counts or average tickets per pet. So we're feeling very good about initial indication. We are getting obviously every week, we get more data was more so.

It is open but we've not seen a change in the data.

Since we started the Reopenings just as you know past six weeks and we continue to see a building.

Now we're excited about the 95% we couldn't be happier that we're going to really get back to 95%, but as third third quarter.

Yeah for sure.

The last one I had was.

You know with with the work that you've done now with safety.

Protocols and <unk> and other things that you put in place to maintain social distancing standards in the health and wellness of your employees.

You know it does this make it less likely in the case of a resurgence of the virus in a in a particular area or region does it make it less likely that you'd have to you know re close.

Up facility a location at this point.

Yeah, that's that's exactly what it does HM we needed to get those protocols in place we needed to get those that P.P. in place. So because were classified as an essential business I've been very services across the country are essential businesses. Because we now have these protocols. These procedures in place. It does mean that we would be able to up.

Right in an environment should there be any additional shutdown.

Okay.

Helpful. Thank thanks, a lot good luck aboard.

As Tom.

This concludes today's question and answer session I would like to turn the conference back over to quite Christiansen for any closing remarks.

Again, I'd like to first Ah. Thank all of our people here part of Q and our retail partners for all the work that was done during the quarter to become a stronger company coming out of a quarter and and all the work that was done for us to be able to ship and produced a record results in a very tough work environment with our people. So thank you to all of them I want to thank all the shareholders that.

And with US and continue to support us and thank all to the analysts have orthos today with for the great questions at a time, where I will spend with you, but I do you is becoming a stronger company through co, but we are ready to come back to work and being a place where we won't have to close we will get off stores all backup into running being able to provide such a valuable service that is more pet parents are.

More cost conscious and than ever before on this pandemic, we will be a place where they can find the best cost for their services on a products in the country and that's going to resonate and continue to build and we're confident that the kind of you'll continue to grow and produce the kind of results. You're seeing is produced for many quarters. So thank you again for your time and we look forward to reporting again in a few weeks as we.

I get to the through the Q3 and read the rest of your thanks everybody.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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