Q3 2020 PetIQ Inc Earnings Call
Welcome to conferencing service might get your first and last name.
David Brown.
David Brown in which company or U.S.
IRA A.E.R.A.
Hey, I <unk>.
Yes right.
And your phone number.
Two one to 90 603697.
I'm, sorry, what was the middle digits 360.
Two one to 960 3697.
It's it's perfect I'll pitch right.
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For instance gap please refer to today's release for a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with gap. In addition, <unk> posted a supplemental presentation on its website for reference and now I'd like to turn the call over to cord Christiansen.
Thank you Kitty and good afternoon, everyone. We appreciate you joining us today to discuss our third quarter financial results I will begin today with an overview of our business. Some strategic results for the third quarter. Susan will provide detailed our services segment Panjon will discuss our quarterly financial results in more detail finally, Susan John and I will be available to answer your question.
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We believe the diversification of our business model has helped US this year. The product segment has really fueled our financial results here to date can redo some of the financial impact from the services segment.
Because many of you know the second and third quarters of 2020, where harder to navigate them prior years, given the impacts to our business from COVID-19.
That said I cannot be proud of our team all of whom stepped up and worked incredibly hard.
The answered pedicure with his best positioned as possible in this dynamic operating environment. This includes collaborating on solutions for key business challenges and Opportunistically capitalizing on areas of our business, where there was a need for our pet health and wellness products.
As I noted in today's press release, we experienced in a typical business cadence for the majority of the year in our products and services segment, resulting in episodic surges in demand and extensive temporary veterinarian clinic closures.
This is made our quarterly your over your comparisons less indicative than a year to date comparisons when measuring the strength and momentum of our underlying business trends.
Based on a year to date results and keep programs already plan for 2021, we have tremendous confidence in our future growth trajectory.
Focusing on a quarterly results in more detail recall that in queue to the product segment delivered the largest quarter in the company's history for both sales and profitability. As a result, we communicated to you that are two three product segment would be down in both sales and profitability year over year and compared to the second quarter of 2021.
We benefited from owning Purgo animal help for a full quarter and a partial contribution from cap star our product segment that sales were down slightly more than we anticipated due to an unanticipated early transition of a program with a key retailer to support growth for 2021.
This resulted in sales at the lower end of our guidance and adjusted EBITDA below our expectations John will discuss this in more detail.
The important takeaway here that we believe this volatilities transitory as a result of COVID-19 year to date. The product segment is outperforming our original expectations for the year with net sales up over 20% as.
As a result of our ability to grow and work collaboratively with our retail and E. Commerce partners, we plan to invest in production and distribution capacity beginning late this year and into early next year. This also supports our confidence in <unk> long standing relationships with our distribution partners, which we expect to continue to grow significantly in 2020.
One in many years to come.
During the quarter, we successfully completed the acquisition of <unk> and after owning a business for three months. We believe we have clear line of sight too conservatively achieve our state of greater than 20 million of incremental EBITDA contribution the full year of 2021.
When looking at the year to date results for cap star pig or greater than the broader market and we believe this momentum will continue into 2021.
Taking a closer look at our product segment for the third quarter sales were led by E. Commerce business that was up over 29% versus Q3 of last year.
Are not R. M E Commerce business was up 38% year over year for Q3 are manufactured E. Commerce business was up 161%, including cast star or up 92.5%, excluding cap start or.
Our products team emphasis on winning it both retail any commerce is paying off.
Are distributed manufactured product sales makes continued to improve beyond the 75%, 25% historical sales mix for the quarter and we expect to see further improvement in 2021.
Shifting to our services organization our team aggressively execute are reopening plant in Q3, where please restart stated objected with 95% of the service a segment reopened and we're in the final stages of having all of our wellness centers and mobile clinics reopened.
Although are openings continue to demonstrate that we have returned to pet counts an average ticket for a pet in line with our numbers pre COVID-19, and ahead of <unk> of the prior year period, we're continuing to experience COVID-19 headwinds caused by having to close 12% to 16% of clinics and operation due to employee have some tea.
This is caused by employees, calling in with COVID-19 related symptoms and illnesses across our National services network.
We hope this will improve very soon but are pleased to report that the clinics that are operating are delivering the individual profit contribution we would expect from those operations.
The service a segment results were in line with our expectations for the quarter, albeit below the prior year as we expected from the temporary closures our management team estimates that the third court in fact of the services segment for these closures was approximately 27.5 million of revenue and approximately 6.2 million of adjusted EBITDA <unk>.
Total service segment revenue for the quarter would've been approximately 39 6 million and adjusted EBITDA five 9 million hit the surface segment achieved its budget.
Despite the headwind in our service operations during the temporary closures and the closing of cap Star on July 31st we remain in a healthy financial position, we continue to have ample liquidity and financial flexibility with our cash on hand cash generation, an existing availability and our revolving credit facility.
In fact in addition to add in future manufacturing capacity for our product segment. We're also strategically investing in our services segment to support our longterm growth trajectory.
We are pleased to have doctor, Laura and all of us in on our team as Chief Medical Officer. She is doing an excellent job working with Susan to build out a robust organization to support both our expansion of telehealth and the resources needed to fuel our growth in 2021 and beyond we.
We have a strong recruiting platform in place and are making continuous improvements to best position. Our services organization as we return to a more normal wellness center opening plan for next year.
We believe Pedicures mission of delivering smarter options for pet parents to help enrich their pets lives through convenient and affordable access to veterinarian products and services has never been stronger.
In summary.
Could I Q remains 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 in O T C medications at a value.
All our financial results have been impacted by COVID-19, and their interim we have many reasons to be very optimistic about 2021 and beyond.
Alright Wellness center Grand openings in the third quarter ahead of schedule.
50% of our openings were greenfield clinics, and 50% where community clinic conversions.
The pandemic resulted in the strengthening of our relationships and long term planning with our retail partners.
Our pet parents made it known to our partners that they relied on our services to take care of their pets.
These openings now bring us to a total of 99 wellness centers open for Q3.
We have 19, new openings slated for Q4, which keeps us on track for our twenty-seven new wellness center commitment for 2020.
In addition, we've been working diligently on our clinic launched plan for 2021 and have already started building clinics slated to open in Q1.
Our total wellness Center Buildout plan for 2021 will be in a range of 132 170, new wellness centers.
I've mentioned in the previous statements that early in the pandemic. The services team worked on number one getting our clinics back up and running with the right protocols in place, but too I want to emphasize that along with launching innovative platforms like telehealth and telemedicine. We also prepared the organization for the next four years that build out.
To get a N R Chief Medical Officer Doctor Lorna live essence reorganized and relaunched our veterinary structure in Q3 with one of the objectives being to attract and retain the veterinary talent, we require to become a long term sustainable player in this space.
Through our growing recruitment team and the medical Affairs organization, we continue to enhance and build our veterinary recruitment efforts across the country to support our growth for 2021 and well into the future.
In addition to the reopening of our wellness and community clinics are thirty-seven field offices are open and fully operational running twice as many clinics again September compared to August and continuing to ramp in October.
As Gordon mentioned earlier, our newest challenge is managing Covid related symptoms <unk> illness with our teams.
While we have the required protocols and procedures in place week to week, approximately 12% to 16% of our community clinics and wellness centers are temporarily closed due to employees with COVID-19 symptoms or infection.
This dynamic is in line with traditional veterinary clinics as staffing levels are often kept at a minimum with no additional support staff to backfill.
As we move forward, we are optimistic this level of absenteeism will improve but as you can imagine it makes forecasting results much more difficult in the near term.
However, we do view this is transitory in nature and believe we were incredibly well positioned as the impacts to services related businesses in particular begin to improve as a whole relative to product only related businesses, which have outperformed in the last six months.
That said in total I'm thrilled to report that even in the ongoing and very dynamic COVID-19 operating environment, we have experienced solid increases in Pittsburgh clinic and dollars per pet in fact Ah results for these metrics or quickly coming back in mind with prior year and continue to escalate even considering the traditional.
Eric business seasonality for the same period last year.
These are very encouraging metrics for our business and speak to the pent up demand in the industry for veterinary services.
Over 40% of our pet parents are new and many of them already have a full service veterinarian, but are often experiencing long wait times until they can get in with their pet do to enhance safety procedures and shorter or more limited veterinary schedules as a result of COVID-19.
So how are we doing with our pet parents.
In a recent survey as a pet parents that have used our services upon reopening over 90% are likely to recommend us to friends or family survey results, which are inclusive of our new procedures. We're very pleased with the high pet parents satisfaction rates in this time of heightened uncertainty pet parents are seeking out solutions for for.
Double veterinary care at increasing rates and had I T was national network up convenient and affordable clinics are the perfect solution to meet their needs.
Our value proposition strengthens and relevance every day as news channels focus on record setting numbers of Covid positive cases.
I do Wanna talk for them at about a minute about our pet parents and pet parents that had been financially impacted during this pandemic.
Two thirds of the pet parents, we serve make less than $60000 per year and more than 55% of them are baby boomers or in the ages of 45 to 75 years of age had.
<unk> value proposition to pet parents remains a key component to our future growth, we already knew pre pandemic that pet parents believe their biggest challenge and caring for their pet was the cost.
Today, the data and the demand tells US This challenge is consistent and in many circumstances value for veterinary services is higher than ever before.
We believe pet I choose leadership position in the market the strength of their relationships with our host retail partners. The team we've put in place and the years of growth that lie ahead for our business position as well to capitalize on these and other opportunities within pet health and wellness.
At the same time, we are focused on and have a tremendous opportunity to serve more millennials that are increasingly becoming pet parents. We know they welcome lower cost veterinary services and are more likely to seek retail locations to provide those services due to their convenience.
As you might expect we talked to our boomers millennial pet parents differently.
We leverage our digital platforms for each of them differently.
We continue to add new wellness centers. We will also continue to become experts on pet parents and how to engage both new and existing pet parents are like.
Finally, I'm proud to say that today, but I Q offers telehealth services and all 41 states that we operate in order to enable us to have a veterinary professional available to our pet parents 24 seven.
In addition, we currently cover approximately 50 per cent of the states that allow us to establish relationships with pet parents by a telemedicine.
We expanded our telemedicine platform and cute you need to include Ohio as well.
And from cap Star.
Importantly.
On a year to date basis, our product segment has outperformed our expectations with net sales up 20.4% to 580.7 million and adjusted EBITDA increased 65% to 92.4 million.
We estimate the COVID-19 related impact from temporary closure of our services segment to be approximately 27.5 million in loss net sales and a reduction of 6.2 million in adjusted EBITDA for the quarter. If existing service locations had remained open and performed at budget.
On a year to date basis, this equates to 75 million.
The quarter were 150.1 million a decrease of 7.1% year over year importantly.
As I mentioned earlier on a year to date basis, our product segment net sales are up 20.4% to $580.7 million.
Adjusted EBITDA increased approximately 65% to over 92.4 million.
Our year to date products segment results are ahead of expectations that we had for the business at the start of the year.
[noise] consistent with recent trends, our ecommerce channel experienced disproportionate growth and our manufacturing business continues to dramatically outperform our goal of 25% sales growth due to the success Weve had integrating our brands such as pet arm or into the customer network.
Combined we realized a nice gross margin lift when coupled with our fixed DNA in the product segment, we were able to generate healthy operating leverage which is a primary driver for the strong growth of segment adjusted EBITDA year to date.
Within our services segment net revenues were 12 million compared to 24.5 million in the same period last year.
As cordon Susan discussed due to the COVID-19 related temporary closures of the service locations. The company generated much lower revenue during the quarter than in the prior year period. As a result, we reported adjusted EBITDA loss of 200000 compared to $7 million of earnings in the third quarter of 2000.
19.
Finally, adjusted EBITDA was 12 million and on a year to date basis, we increased adjusted EBITDA, 7.5% to 54.8 million.
If you factor in or add back our estimated loss of $6.2 million of adjusted EBITDA from the services segment.
Third quarter adjusted EBITDA would have been approximately 18.2 million and our year to date adjusted EBITDA would have been 74.4 million an increase of 46% year over year.
Assuming the existing services locations had remained open and performed a budget.
In this scenario, we are actually tracking inline with our original guidance of $80 million of adjusted EBITDA for full year 2020.
Turning to our balance sheet and liquidity as of September Thirtyth 2020, our long term debt balance, which is largely comprised of our revolving credit facility term loan and convertible debt was 361.7 million.
We had total liquidity of approximately 152 million.
In closing.
We are pleased with our year to date financial results in what continues to be a dynamic operating environment.
The financial strength that our product segment provides to our broader business as an important component in the resilient nature of pad Q.
Carter was not anticipated and we were given the message after we'd given guidance the <unk>, even I impact being so much on that amount of sales isn't just because the margin was so significant. It's also because we took a fairly significant accrual.
In Q3 for the impact in queue for because that's the accounting principle for when you're aware of is coming we believe we've accurately capture the queue for impact.
But again, there's some unknowns there, but we don't believe will be significant that's why it's such a significant impact here and if it wasn't for that.
Issue becomes it becomes much more difficult to fill with staff at the last minute. When there is a cobot illness. For example, we take our our staffs temperatures prior to clinics.
And if we have someone that registers.
We are I think a good place in our ability to be able to continue to try to backfill those positions, but I would say that at that at least now through the balance of this year my expectation would be that will probably stay within that 12% to 16% range until we've got better line of sight of it completely subsiding.
Okay. Thanks, Susan it's helpful. What last one for me.
The outlook for the number of new locations or centers next year 130 to 170.
How do you.
Could you talk a little bit about the visibility into that I mean, how many of those are kind of already committed do you have a sense of the the mix of retailers.
Your Doctor, Laura and all the lesson.
So so we we have it programs can place where we go out we have partnerships with universities now that we didn't have previously and so we feel very good about 2021, and our ability to get these babies up and running.
Cool. Thank you. Thank you I appreciate all the work.
Thank you John.
Thank you. Our next question comes from the line of stuff with sync with Jeffries is proceed with your question.
Cold and and drive those online sales so.
I I think, albeit we all believe that the online channels still going to be incredibly important as consumer habits of change and definitely during covid people are are definitely using it uhm and it's definitely becoming more a a habit and more a part of their normal purchasing patterns is what we're seeing but it is not the the panic purchasing is the only channel available that we saw in second quarter and we're seeing some.
Wonderful thank you very much.
Thank you. Our question comes from the line of Bill Chappelle with Truest Securities. Please proceed with your question.
Oh, Thanks, good afternoon.
The.
Gord.
Yes, I'm here.
Yes can you just.
Help me in Layman's terms I understand.
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Occasions that weren't already kind of expected for 2020 that have been moved to 2021, where we could see possibly a 200 or even 300 next year.
Plans to and then I just want to kind of talk about that in terms of perspective, both in terms of of selling products first and then secondarily in terms of of attic, adding clinics and retail. Thank you.
Yes, thanks for the question obvious.
Obviously, we watch very closely all of our brick and mortar retailers and all of our online customers well assess the health of the business and there's no doubt that theres definitely companies that are doing better than other companies that retaining their customers keeping their traffic operating the environment and we are seeing some of the weaker ones have issues and and wash out.
Frosted exactly as as more people get into it it brings more attention to it which we believe accelerates the acceptance of the the acceptance of the various local governing bodies that allow more and more things to be done with telehealth and telemedicine until the triage, which only helps us generate more revenue.
And and do more so as as we talked about we were making three very key investments in our services organization and it is it's all about bringing more veterinarian capability. There in one of those as our telehealth platform to be even better prepared as we're seeing it as a a net positive revenue and profit growth vehicle for the company and I think you'll be excited to see some of the progress.
We're making are able to talk about it in the in the next few months as we continue to do more and more on this basis, we've started to see those results come through.
Susan I Miss anything.
No I think the only thing that I would add David is that first of all our service that we have that we will now in our partnership and it's 24 seven so we have a 24 seven capability with with all of our pet parents number one and then number two I think it's <unk> said, because we have that <unk>, we have the ability to close that loop.
<unk> deliver a very strong year next year.
Hi, Thank you so much.
Thank you and I will now turn it back to management for closing remarks.
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