Q4 2020 PetIQ Inc Earnings Call
Thank you for standing by this is the conference operator.
For the pet IQ fourth quarter and full year 2020 earnings conference call. During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by the for on your telephone keypad. If at any time during the conference you need to reach an operator. Please press Star then zero.
A reminder, this conference is being recorded I would now like to turn the conference over to Katie Turner Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us on pet Iqs fourth quarter and full year 2020 earnings conference call on today's call are cord Christensen, Chairman and Chief Executive Officer, Susan Sholtis, President and John Newland, Chief Financial Officer before we begin please remember that during the fourth of this call management may make forward looking statements within our means.
Of the Federal Securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward looking statements. Please refer to the company's annual report on form 10-K, and other reports filed from time to time with the Securities and Exchange Commission and the company's press.
Release issued the day break each all 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 today's call management will refer to certain non-GAAP financial measures, including adjusted gross profit adjusted SG&A 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 as a substitute for the financial.
[noise] formation presented in accordance with GAAP. Please refer to today's release for a reconciliation of non-GAAP financial measures. The most comparable measures prepared in accordance with GAAP. In addition, penikese posted a supplemental presentation on its website for reference.
Now I'd like to turn the call over to cord Christensen.
Thank you Katie and good afternoon, everyone. We appreciate you joining us today to discuss our fourth quarter and full year 2020 financial results.
Today, I will begin with an overview of our strategic business and financial highlights and Susan will provide greater detail on our services segment and Jon will discuss and review our financial results.
Finally, Susan John and I will be available to answer your questions.
In 2020, the diversification of our business model and the complementary nature of how we connect with pet parents across our products and services segment has never been more evident.
We generated record fourth quarter and full year net sales of $164 2 million and $780 1 million, respectively, and full year consolidated adjusted gross margin improved 130 basis points to 19, 6% and.
And adjusted EBITDA of $67 8 million increased nearly 12%.
This is impressive considering we operated much of the year with our wellness centers and community clinics temporarily closed due to COVID-19, while.
And while we started reopening a small number of our locations in May we still had certain regions for example, in California, where clinics and wellness centers were not reopen until early in the fourth quarter based on local and state regulations and restrictions.
We continue to operate across our entire organization with our number one priority being the safety and health of our employees.
Our team has done a tremendous job to execute on our strategic objectives. Their agility and collaboration have helped us serve our retail and E Commerce partners.
We've experienced changing consumer purchasing habits that have meant we needed to be flexible to ensure we are serving pet parents and their pets, where and when they needed to fulfill their pet health and wellness needs.
The financial strength of our product segment provides for our broader business is an important component of the resilient nature of debt Iq.
The product segment fueled our financial results in the fourth quarter and for the year. This helped to reduce some of the financial impact from our services segment.
As we discussed on previous calls this year in the middle of the year during Q2 and Q3 in particular, we experienced fluctuations in our business related to COVID-19.
Noting an episodic surges in demand for our products business.
At times this made our quarterly year over year comparison comparisons less indicative than our year to date comparisons when measuring the strength and momentum of our underlying business trends.
Accordingly, what has not changed.
Our robust industry tailwind, including the Humanization of pets and continued significant growth in our categories. As pet parents are taking better care of their pet health and wellness needs.
These tail winds are demonstrated by our our annual product segment net sales increase of 17, 6% year over year to $725 7 million and adjusted EBITDA margin increased 440 basis points from Q4 last year to $17 one per cent.
Our products business outperformed our original expectations for the year, despite any COVID-19 related volatility.
Taking a closer look at our product segment for the fourth quarter sales were led by our E. Commerce business that was up over 42% versus Q4 last year or.
Our non <unk> E Commerce business was up 39% year over year for Q4 are manufactured E. Commerce business was up 161%, including cap star or up 95% excluding cap star.
Our products team emphasis on winning at both retail and e-commerce is paying off.
The products segment distributed and manufactured product sales mix continued to improve beyond the 75%.
25% historical sales mix for the quarter and we expect to see further improvement in 2021.
Q4 marked our first full quarter of cash starved.
With results that continued to outperform our expectations, we have clear line of sight to conservatively achieve our stated greater than $20 million of incremental EBITDA contribution from cap star in full year 2021.
This will also drive additional products segment margin improvement in 2021 based on our Q4 and full year 2020 results in key programs already planned for 2021, we have tremendous confidence in our future growth trajectory and business momentum.
But IQ participates in several of the largest and fastest growing categories within the pet industries, such as <unk> solutions and health and wellness.
As these categories have evolved both in size and channel we are purchasing market data to better reflect our understanding of the cattle feed them.
This new E Commerce data comes from a broader Nielsen report and data from our partner of IRI known as 10 10 data.
For the 52 weeks ended December 26 2020. These.
These datasets show, the flea and tick category growing 11% and now eclipsing a $1 5 billion market in the OTC products segments.
I'd Iqs flea and tick manufactured brands outpaced this category by growing 13%, while picking up 40 basis points of share in 2020.
These share gains were driven by the E Commerce channel, where our brands grew 63% year over year.
Our performance in these fast growing set of customers was fueled by the cap Star brand, which was up 73%.
Along with <unk>, plus which was which grew 41%.
That IQ continues to lead the fastest growing for them within the flea and tick category oral treatments.
In 2020. This segment grew 24% with pet iqs portfolio growing 26% and commanding the largest share of any oral brand in the measured oral category.
This segment is expected to maintain strong momentum as we head into and throughout 2021.
For the 52 weeks ended December 26, 2020 based on the same datasets, the health and wellness categories grew 42%.
And now eclipsing an $800 million market in the OTC products segments.
Covid IQ brands grew nicely at 22%, Yeah, we trailed the category duty just beginning to build out our portfolio within the E. Commerce segment for the category is growing 66%.
We view this as a strong incremental opportunity as we move forward.
In 2021, we plan to launch an advanced product lines to better position us to compete within the E Commerce channel.
These types of premium offerings or what have led ecommerce to become dominant across the market within health and wellness.
We are excited to begin participating in this segment and to provide our loyal consumers, an even better options to meet their needs of their pets.
As a result.
Our ability to grow and work collaboratively with our retail and E. Commerce partners beginning late in Q4, we invested in production and distribution capacity.
This investment is continuing into Q1 and supports our confidence in <unk> long standing relationships with our distribution partners, which we expect to continue to grow significantly in 2021 and for many years to come.
Shifting to our services organization, our team reopened 100% of our clinics and wellness centers in Q4 in line with our stated objectives.
We finished 2020 with 126 wellness centers and operations, including 19 Wellness center openings in Q4.
Although our openings continue to demonstrate that we have returned to pet counts and average ticket per pet in line with our numbers pre COVID-19, and ahead of the prior year period.
We are continuing to experience COVID-19 headwinds caused by having to close 12% to 16% of clinics in operation due to employee absenteeism.
This is caused by employees, calling in with COVID-19 related symptoms and illnesses across our National services network.
While we hope this level of absenteeism will lessen as we move forward we.
We are pleased to report that the clinics that are operating are delivering the individual profit contribution we would expect from those operations.
The improvement in our services segment is most evident when taking a look at our results from Q3 to Q4.
Services segment net revenue increased 60% from Q3 and on a year over year basis. Our net revenue for Q4. It was down one 5% to $19 2 million, but almost back to breakeven. This is significantly better than the deficits. We saw in Q2 and Q3.
Our management team estimates that the fourth quarter impact for the services segment for those closures was approximately $5 6 million of lost revenue and approximately 680000 of adjusted EBITDA.
Total service segment revenue for the quarter would've been approximately $24 8 million and adjusted EBITDA of $1 2 million at the services segment remained open and achieved its budget.
We are pleased with the improvement in our services segment results for Q4 and to start 2021.
We are expanding our telehealth platform and the resources needed to fuel our growth in 2021 and beyond our.
Our recruiting of new veterinarians and vet, Texas progressing in line with our growth objectives.
We believe that <unk> mission of delivering smarter options for pet parents.
Help enrich their pets' lives through convenience and affordable access to veterinarian products and services has never been stronger.
From a balance sheet and cash perspective, we continue to have ample liquidity and financial flexibility with our cash on hand cash generation and existing availability under our revolving credit facilities to support our future growth.
And although we have suspended formal guidance due to uncertainty from potential COVID-19 related impacts to our business. We do want everyone to understand that as I stated on our Q3 call. We continued to maintain an internal budget of approximately $950 million in net sales and over $100 million.
Adjusted EBITDA.
With the only significant variables for this plan being absenteeism affecting our services segment results.
We have great visibility for another year of significant margin expansion and adjusted EBITDA margin expansion, demonstrating accelerating profit leverage at pet IQ.
We will continue to monitor this as the year progresses and as we reach a steadier state with lower are minimal rates of absenteeism will then be in better position to provide formal annual guidance.
Before I turn the call over to Susan I would like to welcome Cheryl Lachlan and Kim left go to Cat IQ, both as independent directors on our board of directors.
We are thrilled to have both of these talented executives joining our board and we look forward to their significant contribution to our business.
In summary.
We believe per iqs differentiated position in the animal health industry will continue to fuel our long term growth.
Our vertically integrated product manufacturing and distribution platform and national footprint of convenient and accessible veterinarian services prescriptions and OTC medications at a value are resonating with pet parents.
We are fortunate to be in an industry that continues to experience rising pet adoption increases in dollar spend per pet and an emphasis on affordable convenient pet health care.
We believe that IQ remains well positioned to capture a disproportionate amount of the industry growth as we move forward.
With that overview I would like to now turn the call over to Susan.
Thank you for corn.
The fourth quarter marked a significant turning point for the services segment as we continued to navigate operating any ongoing COVID-19 environment.
Line with our stated objectives, we reopened 100 per set of our community clinics and wellness centers during the quarter and we celebrated 19, new wellness center openings.
Of these openings, 58% were greenfield clinics at 42% were community clinic conversion.
This brings us to a total of 126 wellness centers in operation to end 2020.
Our 37 field offices remained open and fully operational and continued to ramp throughout the quarter in order to put us in line with prior year rates to start 2021.
We believe we are well positioned for future growth demonstrated by a strong sequential improvement in our financial results as compared to the third quarter of 2020.
Services segment net revenues increased 60% from third quarter of 2020, and adjusted EBITDA improved by 129%.
We also saw tremendous growth in all of our Kpis versus the prior period. The number of clinics. We ran an increased by 74% and the number of pets, we saw increased by 78%.
This is quite an accomplishment for our organization when you consider the external transitory headwinds we experienced during the year from COVID-19.
Throughout this time, we've also continued to pay close attention to the veterinary services industry and <unk>.
Benchmark ourselves versus the veterinary services market.
We are incredibly pleased to report that although we temporarily closed our clinics anywhere from three to nine months in 2020, our pet counts and our clinic revenue in Q4 quickly caught back up to the industry growth percentages for versus prior year.
These results continued into January where we outperformed the veterinary services industry in both head count growth and clinic revenue versus prior year.
Our team also continued to connect with more pet parents and their pets virtually via our telehealth platform.
I'm proud to say today that pet IQ offers health care services in all 41 states that we operate enabling us to have for veterinary professional available to our pet parents 24 seven.
Calls haven't slowed.
Even in the winter months as many pet parents continue to stay at home or work from home and look for ways to care for their pets.
Our segment net revenue of $19 2 million was just 200000 or less than Q4 last year, while adjusted EBITDA was down 1.4 million versus the prior year period.
This reflects the slightly lower sales and the ongoing impact from COVID-19 related to absenteeism, which cord mentioned along with the costs associated with opening 19, new wellness centers.
I'd like to thank our entire team for their unwavering dedication and hard work.
Closing, our clinics and reopening with completely new protocols and delivering these types of results is a true testament to the team.
Their commitment and focus on furthering our mission of delivering a smarter way for pet parents to help their pets live their best lives for convenient access to affordable products and services has fueled the improvement in our results as our clinics and wellness centers reopened.
In addition, we've said throughout them that Mac that are affordable positioning is in the right place at the right time.
During 2020 in the wake of COVID-19, packaged stack status shows that 42% of dogs in the nurse and 43 per cent of cat owners are paying closer attention to their pets' health and wellness.
And importantly, 32% of dog and cat owners, who consider their pets part of the family.
Concerned about the affordability of routine health care for their pets.
As I mentioned last quarter dependent because resulted in the strengthening of our relationships and long term planning with existing and new retail partners.
Believe we are in a stronger position than ever before to connect with more pet parents and their pets.
We continue to expect our total wellness center build out for 'twenty and 'twenty, one will be in the range of 130 to 170, new wellness centers.
Looking at the year in total we expect our new unit growth to be evenly weighted between the first half and the second half of the year and as previously reported 60 per cent of our new wellness centers will be conversion clinics, and 40% will be greenfield clinics.
We're continuously recruiting veterinary talent to support our growth objectives and to position us to become a long term sustainable player in the industry.
Through our growing recruitment team and the medical Affairs organization, we've continued to enhance and build our veterinary recruiting efforts across the country to support our growth for 2021 and well into the future.
In Q4 and still today, we've continued to maintain our curbside service and our virtual aligned management process in order to meet pet parents needs and to help US best managed lines to ensure efficient social distancing practices.
Safety protocols were designed with our retail partners to help keep all people protected and safe.
The experience of this past year have taught our team to be resilient in the face of adversity.
Our ongoing challenge continues to be the management of Covid related symptoms and illness with our teams.
Even with our required protocols and procedures in place week to week, approximately 12% to 16% of our community clinics and wellness centers are temporarily closed to them for what day, two employees with COVID-19 symptoms or infection.
In addition, the inclement weather across the nation in February has thrown at additional challenge our way.
But we know like all consumer facing businesses, we are not alone and both of these challenges are transitory.
Because of our strong return to business in Q4, and our January results, we remain optimistic.
Absenteeism will improve and warmer weather will bring pet parents out of their homes, but as you can imagine all of this makes forecasting results much more difficult in the near term.
Another sign of ongoing improvement in our segment results as a solid improvement we are seeing in our kpis versus prior year, when we and our pet parents weren't in the midst of a pandemic.
I'm pleased to report that we are experiencing solid increases in pets per clinic and dollars per pet in fact, our results for each of these metrics have quickly come back in line or are exceeding prior year.
It's important to highlight that these Q4 achievements in both volume and revenue were achieved with absenteeism and with the additional safety protocols in place.
These are very encouraging metrics for our business and speak to the pent up demand in the industry for veterinary services.
A couple of additional items I would like to share reinforcing the health of our services business and the state of mind of pet owners today for.
Yeah.
50% of pet parents that utilized our services in Q4 for brand new to Pet IQ.
Ive spent three of the last seven weeks in the field.
Parents are coming to pet IQ for two reasons affordability and convenience.
Second we relaunched our smart kilowatt care wellness plans from January to date over 7% of our pet parents are purchasing them.
Smart care wellness plans provide pet parents are weighted to care for their pet throughout 2021 for a low monthly fee.
Pet parents are eager to care for their pets and pet Iqs wellness plans are affordable.
In summary, we believe pet iqs leadership position in the market the strength of the relationships with our host retail partners. The team we've put in place in the years of growth that lie ahead for our business.
Vision as well to capitalize on these and other opportunities within pet health and wellness.
Our research and results continue to indicate that pet parents are seeking out solutions for affordable veterinary care at increasing rates.
Net iqs National network of convenient and affordable clinics are the perfect solution to meet their needs.
With that I'd like to pass the call over to Jon.
Thank you Susan.
We are pleased with our robust fourth quarter 2020 financial results.
<unk> mentioned, both our net sales and adjusted EBITDA were higher than we expected to finish the quarter and the year.
Our diversified business model has helped to fuel our consolidated results.
And positions us well to continue to benefit from the favorable pet health and wellness industry tailwind.
Our product segment generated solid results in our services segment improved 60 per cent from third quarter of this year to almost achieve breakeven sales with the prior year quarter.
This is quite impressive as we continue to experience absenteeism between 12% to 16%, creating closures week to week due to COVID-19 illness.
We estimate the COVID-19 related impact from the temporary closure of our services segment to be approximately $5 $6 million from lost net revenue.
Reduction of 680000, and adjusted EBITDA for the quarter.
This assumes that our existing services locations had remained opened and performed at budget.
On a year to date basis. This equates to $80 3 million in estimated lost net revenue and $16 3 million corresponding reduction in adjusted EBITDA.
Based on these estimates full year service segment net revenue would have been $134 6 million and adjusted EBITDA of $19 7 million.
Shifting to our consolidated results, we generated record net sales increase of $10 million to $164 2 million.
This was $20 million above our expectations for the quarter driven by a return to normalized inventory levels at our customers and a return to prior sell through growth rates.
Minder, we had an unusual surge in product segment orders from Q2 related to COVID-19, which corrected itself during Q3.
We were pleased with how well our products business performed during 2020.
Teams' ability to have agility as they navigated through COVID-19, and the shift in consumer shopping habits related to the pandemic.
To start 2021, we expect to see continued growth in our manufactured higher margin product offerings, particularly as we benefit from the contribution of <unk> portfolio of products, which we acquired on July 31 2020.
And continued growth in both our per go animal health acquisition items.
Our existing health and wellness products.
Fourth quarter gross profit increased 39, seven per cent to $28 6 million and gross margin increased 415 basis points to $17 four per cent, even as the company experienced an estimated 264 basis point headwind from the temporary services.
Closures due to COVID-19.
Adjusted gross profit was $32 3 million and adjusted gross margin was 20 per cent for the fourth quarter of 2020.
Representing 280 basis points of margin expansion.
Costs associated with the temporary services segment closures are added back.
Fourth quarter, 2020, general and administrative expenses were $32 6 million compared to $23 6 million in the prior year period, an increase of $9 7 million.
Adjusted General and administrative expenses were $26 9 million compared to $22 4 million in the prior year period, an increase of $4 5 million.
This increase reflects $3 million of incremental amortization expense associated with the purchase of cap sorry.
$1 million of normalized selling and marketing expenses related to the cap Star brand.
500000 of professional fees associated with first year Sarbanes Oxley control testing.
Excluding the increased amortization expense in the control.
Testing fees previously mentioned adjusted General and administrative expenses would have been $23 4 million or 14, 2% of net revenue displaying 26 basis points and continued G&A leverage.
At the segment level for products net sales for the quarter for $145 1 million, an increase of seven five per cent year over year for.
For full year, our product segment net sales were up 17, 6% to $725 7 million. This was on top of a strong product segment net sales growth of 41, 8% in 2019.
And adjusted EBITDA increased approximately 45% for over $24 8 million.
On a full year basis products, adjusted EBITDA increased 59% to $117 2 million.
Our 2020 product segment results were ahead of expectations that we had for the business at the start of the year.
Keep in mind for the fourth quarter, we experienced a more normal margin contribution from the cap star products now that we sold through the on hand inventory that was at our historical distributed product margin profile.
Also consistent with recent trends across the consumer industry, our ecommerce channel experienced disproportionately higher growth rates than other sales channels in total for manufactured brands, including pet armor and cap star are experiencing some of the highest growth rates they have ever generated.
These factors helped fuel healthy operating leverage which is the primary driver for the strong growth of the product segment adjusted EBITDA.
Within our services segment net revenues were $19 2 million compared to $19 4 million from the same period last year.
Accordance Susan discuss due to COVID-19 related temporary closures of the services locations.
Company generated lower revenue during the quarter than the prior year period. However, we significantly close the gap seen in Q2, and Q3 and our results and on a year over year basis, we were nearly back to breakeven versus a significant deficit in Q2 and Q3.
On a sequential basis net revenue increased 60% for Q4 from Q3, a nice sign of stabilization in the services business as compared to the significant COVID-19 headwinds during.
During the year.
As a result, we reported adjusted EBITDA 510000.
And while down as expected from the $1 9 million in Q4 of last year. It is an improvement of 129% from a loss of 200000.
Third quarter of 2020.
Finally on a consolidated basis Q4, adjusted EBITDA was $13 million, an increase of 34% if.
If you factor in or add back our estimated loss of 680000 of adjusted EBITDA from our services segment.
Q4, adjusted EBITDA would've been approximately $13 seven day.
And if you add back our estimated lost adjusted EBITDA of $16 3 million for the full year, our adjusted EBITDA would have been $84 million, an increase of 38% year over year.
This assumes that our existing services locations had remained open and performed at budget.
In this scenario, we were actually tracking better than our original guidance of $80 million of adjusted EBITDA for the full year that we provided in March of 2020.
Turning to our balance sheet and liquidity as of December 30 for 2020, our long term debt balance, which is largely comprised of our revolving credit facility term loan and convertible debt issued in May of 2020 was $355 7 million.
We had total liquidity of approximately $128 million.
We also have an additional $15 million avere.
Available via an accordion feature of the credit agreement for a total for 143 million of available liquidity.
Working capital increased to $141 2 million for the year ended December 31, 2020 versus prior year, primarily due to the $123 million of net proceeds from a convertible note offering partially offset by the purchase of cap star.
When combined with our available liquidity for <unk>.
Consistent positive contribution from the product segment puts debt IQ in a position to drive free cash flow and build cash in the quarters ahead.
As well as Opportunistically pay down our debt.
From an outlook perspective, we're currently not providing Q1, our annual 'twenty 'twenty, one guidance due to the uncertainty surrounding the impact and duration of the COVID-19 pandemic on their services business as we know.
In today's earnings release, all of our companies community clinics and wellness centers have reopened as of December 31, 2020 for services segment continues to experience an elevated level of absenteeism due to COVID-19 related illnesses and as a result of 12 to 16 per cent of the services segment operations are temporary.
We closed a week to week and the net.
For it to keep employees from pet parents safe.
Nonetheless, we were pleased with the results we have experienced in our wellness centers and community clinics in operation, giving us confidence in our plan to open 130 to 170 wellness centers in 2021 as Susan discussed in detail.
We are pleased with the capstone results from the nearly seven months since we acquired the business.
Our team continues to have confidence about the incremental growth potential for capstone as compared to when we completed the acquisition and we believe the basis for a greater than $20 million of EBITDA contribution for cap sorry for the fiscal year 2021 is very achievable.
In closing, we're pleased with our results for the fourth quarter and the year, we generated record net sales and what continues to be a dynamic operating environment. Our team has executed well and their contributions along with the strength of our pet health and wellness products and service capabilities will enable us to reach more pet parents.
And their pets with a convenient and affordable offerings.
With that overview cord, Susan and I are available for your questions operator.
Thank you if you would like to register for a question. Please press. The one followed by the for on your telephone you'll hear with sweet tone prompt to acknowledge your request for your question has been answered and you would like to withdraw. Please press the one followed by industry.
Our first question is from the line of David Westenburg with Guggenheim Securities. Please go ahead.
Alright, Thank you for taking the questions and congrats on a good quarter.
So when I'm looking at the service Center Math I think you noted $5 6 million. It's what you would have done that's a 29% increase.
Does that include the Athens absenteeism of that 12% to 16% or is that just read out.
The <unk> did.
The opening here and I mean, if it's not.
If if you didn't include the absenteeism I mean does that imply 40% year over year growth.
Thanks for the question.
The comments from the quarter, but the $5 million does take into account for 12% to 16% absenteeism.
What it doesn't take into account in the margin profile is the increased expenses were spending to run the base business during COVID-19.
So the margins would have been significantly higher without those expenses on the $19 million of the $25 million and would've been in line with both 2018 in 2019 operating results.
On the total sales from a margin and sales perspective. So it does does the five does add back the lost sales from the 15% for 29% as the more more.
Accurate growth rate for the quarter.
Perfect Alright. Thank you very much and then in terms of your long term view with cap sorry, I mean, it sounds like you are in integrating this into the portfolio very well it wasn't necessarily core to Alanco. I know you have a lot of the channel. The channel is to use and in those kind of levers to pull now longer term, let's say.
Product and in 2022.
I think that Oh.
What do you think the natural growth rate of that product is and how would it have to have marketing spend.
Hi debt once you for.
He put it on on your.
Channel.
Great question, Dave I think first of all that for kind of take it in reverse order. The the good news is is the P&L that we acquired from along co included a $6 million to $8 million of marketing spend against the brand.
We think that that money will continue to be invested against the brand, but obviously, we understand how to spend it we think significantly better in the right channels that will allow us to properly support the brand going forward.
We saw a very significant year over year growth in Q4 on the brand in certain channels and very nice growth better than we expected overall, but if you remember flea and tick is seasonal fourth quarter is the lowest quarter of the year from a seasonality perspective.
We've started the year with a similar trend in Q1, where we're starting to get into the season, we're anxious to see how Q2 goes but there's no doubt with the margin profile of this product line.
Early indications of the growth that's there that we are being conservative right now with our estimates and if we continue to see these kind of results will be able to give you an update of what the actual long term growth trajectory is but for right. Now we think it's in line with our overall.
Belief of how the company can grow and what that margin profile, it's going to be very accretive to the company.
Great now thank you very much and then just back to the clinics.
You had a lot of reopening as in the quarter.
You performed well.
Can you just maybe give us sort of a base in terms of what they are snapshot of what they look like when you reopen them and what I mean by that is when you.
When you reopened.
The newer ones, what I mean did.
Did they perform like I say its a six months out a six month old clinic did they perform like a six month old clinic or did you have to kind of.
Reopening them and redo the marketing guys. If maybe there are three months clinic.
Does that question makes sense.
I think it is Susan do you want to take it I think with the topics for you and I've talked about a lot lately. So I think you'll do create out of it.
Thank you and thank you for the question David It's it's a good question I think that there are I wanted to just back up for one moment just to talk about the headwinds that we're experiencing when you look at those fourth quarter results.
You remember at the end of the day. We were you know obviously had to put it completely different protocols in place number one number two we had the PPE in place number three we didn't spend anything in marketing in Q4, and so the numbers that you're seeing right now while we were basically back to where we were in the and in prior year.
For a quarter and that's without marketing spend so the demand is there and then the clinics that you that you're talking about the clinics that we opened in fourth quarter. They opened very busy and I think again it comes back to the fact that where we are in the right place at the right time and pet parents at that pent up demand that's out there they've been waiting a year or two.
Come into clinics and and we are definitely seeing that I think the other piece too is that its 50 per cent of the people that are coming to US right now are brand new to us that.
That means that that number one they're not getting into their full service veterinarians right now Oh and number two they're looking to us for affordability.
Thank you very much I'll jump back in queue.
Our next question is from the line of Joe <unk> with Raymond James. Please go ahead.
Thanks, Hey, guys good afternoon.
First question on the Wellness center closures due to absenteeism.
The number that you quoted for Tonight to 12 to 60 per cent that was that was basically the same number that you gave us three months ago I'm curious.
In early 'twenty, One January February with case with Chris numbers coming down overall is that number getting better at all.
In Q1.
Susan you want go ahead.
Yes, no I'd be happy to thank you for the question.
Interestingly enough the App to absenteeism rate has remained in the range of 12% to 16%. It does not change it fluctuates from week to week. So there may be a week, where we're at 12 and then Theres a week that were at 16.
We believe that we'll be more able to accurately forecast absenteeism. Once we start to see that trend dropping very consistently and we haven't seen that trend dropped very consistently.
To give you just a touch of flavor I think around what what what causes absenteeism I think I'll give you just a couple of the top reasons number one is an individual that is working in our clinics that has COVID-19 like symptoms.
Our number one rule that pet IQ, whether you're in one of our facilities are in our all.
In one of our clinics is that you didn't have you do not come to work with symptoms you did not come to work if you're sick.
Number two if we have veterinarians that have a child or a family member that wakes up with COVID-19 like symptoms and they stay home.
That's another big reasons, why we have absenteeism and then third is.
And then Joe digital appeal fine and they come walking into our clinics, we temperature monitor every time people come walking into our doors and if they have an elevated temperature, but they still feel fine.
To close that clinic down so it's it's it is more than just <unk>.
Positive Covid case, it really is very linked to symptoms and I think again, just making sure that we continue to keep people safe, but that 12% to 16% right now is pretty consistent I think as we continue to get the vaccine out and available around the country will start to see those rates drop.
Got it from driving program.
For my smartphone.
Hey, Joe This is core real quick I think I would mention to you is we've modeled out what we're seeing across the entire for quarters and although we're showing it now.
These ranges for Q1 and most of Q2, we do show a pretty significant tapering off in Q3 and Q4.
So like we've been.
Reasonably conservative in our assumptions for full year. If this absenteeism rate is where we've assumed that we should have about a $15 million revenue impact, but no more than a 5 million dollar EBITDA impact from <unk>.
Very different than the $80 million and $16 million, we had in 2020.
And obviously, we work every day to bring that number down even faster and are hopeful that it's better than that but we definitely have control the variables that are affecting the sales and the margin. We know how the impact is felt financially. Our people are very aware of how to do the right things to get the numbers the right place, but again, we're going to put safety first and work our best to get that safety first to also allow us to have her.
Clinics running.
Got it okay. So if I'm interpreting you correctly court it sounds like from an EBITDA perspective for the contribution from services this year.
In 'twenty, one is going to be closer to the 20 million debt.
You did a 19, obviously than the 3 million you did in the morning.
Correct.
Okay.
I think that's about it for me I'll I'll I'll handle everything else offline. Thanks.
Thanks, Joe.
Our next question from the line of Jon Andersen with William Blair. Please go ahead.
Good afternoon everybody.
Good afternoon Jon.
Okay, a few questions.
On the product side.
So we're kind of targeting or budgeting.
When I think about we look at 2021, where we're budgeting around $100 million of EBITDA. Okay.
I understand there is some risk around absenteeism, a little bit that could move that up or down.
But when we think about debt $100 million in EBITDA.
How much.
Is.
Related to kind of your own brand business the product brands that you are.
Owned and manufacturer because I think it may be larger than we.
And then maybe investors perceive.
And obviously, a branded business has more equity with retailers and consumers. So I just wanted to understand order of magnitude there and make sure that's fully appreciated by the market.
Thanks for the question Jon really appreciate the question.
You'll find in the supplemental Powerpoint that we posted on our website a deck slide.
Slide number six in the deck that goes through some of the strength of the business and I do think people have missed some of this.
The strength of whats happening our product business, we've literally maintained.
Almost a 40% CAGR on that business since we went public in 2017 to grow sales from $267 million.
$725 million this past year.
And on track for a growth rate to see another significant increase into 2021.
We've seen our EBITDA margins for that Division go up 460 basis points at the same time to go from $30 million in 2000 $17 million to $117 million.
In 2020 with a very significant increase again in 2021 being projected for the $100 million of EBITDA, we have projected for this year.
Our own brands will contribute a little over 26, 27% of the sales in our product Division.
To be greater than $225 million of the sales.
But will contribute 70%.
Our EBITDA margin for the year almost $70 million.
And so it.
It's a significant contribution to the company's success and when you see the growth rates that we're achieving in the right channels with our own brands like our cap store brand that in fourth quarter was up almost 73% online. Our overall business up 63 per cent per our own brands online pet armor plus up 41%.
We just think we're off to a great start with huge margin expansion in this category for the business, but more important we have line of sight to another significant increase in margin expansion in 2021, that's going to drive our ability to go from $67 million.
Just that EBITDA this year to over $100 million in 2021 so.
I appreciate the question hopefully that is a clear enough answer.
Yes, that's extremely helpful get it leads directly into the next question which is.
If you can tell us a little bit more about.
What youre doing within the owned brand portfolio I understand cap star you've kind of addressed that prior question, but tell us a little bit about.
The rest of the owned brand portfolio.
And where it's growing why it's growing new business opportunities.
And retail set for 2021.
Yeah, I'll leave it with debt.
Great well I think Jon first and foremost we we've obviously had a very strong foothold and have.
More registrations than anybody in the flea and tick category across both topical.
And our oral category now with the comp store brand and view that as a category that we're going to continue to retain our dominant position in and continue to see growth as we continue to develop new items and.
We continue to market and push but we saw a renewal of all of our items in our core business and the contribution that we're seeing the growth rate in those items in the category that we have just the highest gross margin profile for the company. So we're very excited about we're seeing in the flea and tick category.
The other category that we play a significant role and as the health and wellness category.
And that's a category, where we've put a significant amount of development work on and we'll be launching some significant new lines. This year in 2021 day, we view will position us to quickly grow into that number one spot for the health and wellness space as well as a category just a couple of years ago was only a $300 million category.
It's now an $800 million category with almost all of the growth coming online.
Okay and thank you that's helpful last one for me.
Okay.
Sorry court either for.
I'm here can you hear me Jon.
Yeah, I can hear you.
So.
It generally comes up we all get asked about it a lot.
On the distribution side I know it's a.
Not anywhere near a significant portion of your.
Underlying profit base, but is there any kind of an update with respect to.
Distribution partner relationships. Thank you.
Yeah.
I think I've told you in the last call that we.
We have roughly 80% of our distribution volume and profitability coming through our partnerships with the other 20% coming from our zone. So let us.
Relationship to be I agreements, we have aligned on all terms and agreed in all terms. The legal departments are just finishing the documentation and we expect for how the amendment signed shortly and do that that relationships in a very stable place to be a significant contributor for many years with the agreement we have in place.
There is the what is the agreement. We believe is still something that will get addressed in second or third quarter.
But just not at the top of the priority list yet.
But again, we feel great where we are with what we accomplished with B I am that we are in great shape, there and don't see.
Any risk to that business.
That's simple.
Thanks.
That's good news and congrats on the quarter.
Thanks, Jon.
Our next question from the line of Bill Chapell with the Truth Securities. Please go ahead.
Thanks, Good afternoon.
First of all just on absenteeism.
Just trying to understand.
With the understanding that it's not coming down I mean, how much is that in play in terms of both your wellness center rollout and they've been growing the clinics. This year I mean does that cap could you do more if the absenteeism went went lower.
Could you, possibly do less than you expect because of some team theism persists.
Next several months just to get any any thoughts around that.
We really build a separated the issue.
Our building schedules and the absentee issue from a company standpoint, we have set the schedule back in place that we originally established and we've let everyone know we're going to open 130 to 170 locations.
We have a strong belief that the absence he issue will subside and go away this year and with the development of these centers taking.
12 months to 18 months to mature we want to get the scale to get them open and start to get the people in place and trained get the communities. We serve aware that were there.
And start building them, so we're not slowing down because of absenteeism.
We'll be letting people know how it affects it but again with a fairly even development schedule across the year.
We believe most of them will be getting opened when the absent to you that it will be used will be coming down. So they're right now of the board and the management team, we've aligned and agreed on a schedule as to state for the 130 to 170 locations for 'twenty and 'twenty one.
Yeah, I was just kind of wondering I mean, if you have a conversion where there are 16% absenteeism and then youre trying to go from three days a week for five days a week it would seem like there would be some complications there.
Yeah, not really I mean, the issue is where we're seeing the 15% or 12% absenteeism across the broader base and there's a lot of days, we're able to open and keep those clinics open and running and right now it's on a run rate even with that in place where we're profitable across the total service organization, which means.
We think it's the right thing to do to stand up the locations and get them started as far as building more than what we projected remember theres other barriers to growth, which is the rate at which we can hire veterinarians and train and deploy them in and we do feel like we have the right schedule in total for our development schedule of 130 to 170 for this year.
Okay, and then turning to your kind of your discussion about.
The more premium products for the online channel can you just give US you said you built up manufacturing distribution in the fourth quarter. So I assume that implies that we will see these products fairly soon.
Does that affect your existing relationships with retailers does do you expect a meaningful impact here do you have a brand name that we should be looking for anything like that.
Well I think bill if you were to go look at the Amazons of the World, where most of the health and wellness brands have seen their most of their success or direct to consumer.
Theres a few brands have done a really good job at very high price points with premium ingredients and premium packaging and we have increased our ability to for Tuesday significantly higher rate of cold forming products and we've gone through with our formulation teams and new hires to build some very significant.
Items that we'll be launching you'll see them start to launch the first of Q3.
The premium line, there's a couple of products items, we've launched actually this month with Amazon in that space that are more in line with our historical products, but this is a category that we believe there's a significant amount of volume available to us.
Do not believe it impacts our other retailers because we make Oliver items available for all of our retail partners and they'll decide at the shelf spaces available, but at least online. We know we can get all of the items available and it is where almost all of the new growth in the category has been achieved so we're excited to get R. R.
Sites focused on this high growth category and we're excited to participate in having a health and wellness.
Department of inside of our product Division closed the gap in volume and profit contribution similar to our flea and tick category.
Got it thanks, so much.
Thanks Bill.
Our next question from the line of Steph Wissink with Jefferies. Please go ahead.
Thank you good afternoon, everyone and most of our questions have been asked but I have one Susan for you you mentioned productivity enhancements in the service business I think I caught what you said, both volume and revenue per.
Per site had improved I'm wondering if you can talk a little bit about what youre seeing in terms of receptivity among consumers any tech enhancements, you've made that consumers seem to be.
Any upsell talk a little bit about volume and revenue per site improvement if you could thank you.
Yes, absolutely. Thank you for the question.
I think something important that we have we started to do is is we're really following a lot of the published a veterinary service industry reports one of them in particular about success data. We follow it's powered by the AVMA and best source and what's interesting is that if you look at the veterinary veterinary services industry and last.
Last quarter.
Last year in in 2020 volume is relatively flat so two new pets are.
Head count is actually not increasing.
Net revenue is and revenue has been pretty it was pretty consistent last year, but somewhere between 7% and 10% in fourth quarter, we literally were at that same level.
Of what the what the industry standards were but we basically surpass that starting in January and I would say that we did a couple of things in January we doubled actually what the industry was seeing in January from both volume and a revenue standpoint net.
One I think that its technology aside it was more of operating a wellness plan and I think when you think about the consumer today and what what Theyre looking for and what their needs are they were looking for consistency when it comes to what they're spending on and our wellness plans actually help them to be able to budget and plan to spend that momentum.
Basis versus spending.
Quarterly or half year increments. So we have had tremendous uptake I think the industry average for wellness plans is less than five per cent and we have seven over 7% of our pet parents that are taking these wellness plans on.
Because they want to take care of their pets, but they want to do so in a way that they can manage their their budgets as well too I still think that that is very it's COVID-19 related.
And I think it's going to continue to happen throughout this year.
Two two.
Telehealth is another place where we're also seeing enhancements in increases as well to our calls continue to go up and you know you look outside and in most of the country, it's under snow and it's cold but.
But pet parents as they're staying at home or as they're working from home.
They are picking up the telephone and they want to talk to somebody about their pet theyre not necessarily going out.
And visiting a veterinary clinic that they want to get that basic advice on the phone and our 24 seven service has definitely helped us helped us to keep in contact with our pet parents, and especially keeping capex keep in contact with them. While we are closed but we continue to do that when we are opened so I would say from a technology standpoint.
People are getting on their telephones.
Apps.
As well two in regards to chat.
Chad features people are going online chatting just to get basically answers to health questions.
Yes.
Great. Thank you very much.
And next question is from the line of Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
So with regard to the plan to open 130 to 170 clinics in 2021.
Could you tell us a little bit about the progress.
Thus far to date and also what would the geographic dispersion will.
We will be.
Yes, Hi, Brian I'm happy to take the question.
First of all I wanted I want to reemphasize that we are very committed and comfortable with the 130 to 170. This year I think I mentioned last quarter that we've confirmed all locations. So I think that debt what has happened in this past year in particular with our retail partners.
Our ability to bond with them.
Yes pardon.
Interest in crime I would call us managing through this COVID-19 environment. So our retail partners have committed and we have our locations selected for this year without a doubt our cadence is going to be pretty much spread through throughout the year.
One of the things that we've been asked to do by our retail partners is to be flexible on timing of the build out but I'm talking about a month's here in a month, there I'm not talking about six months swings.
And the timing so well we are working closely together to make sure that that we were.
Where we're getting these open and again I don't think it'll be pretty much spread through throughout the year.
Okay excellent. Thank you.
And one more to one final question.
As you guys push more aggressively into ecommerce.
How should we be thinking about.
Margins as you move more into this channel.
Yeah, Great question, we've been fortunate that with our categories and the margin profile of our categories. We have not seen dilutive margin to be online like maybe some of the other categories.
So you should see still like I said earlier in 2021 fairly significant.
Margin.
Increase across the product division.
Very close in size to what you saw this year, how does that division so.
Obviously with all the growth coming there it wouldn't happen if we didn't have fantastic margins in that category. So it.
I think you'll find that the margin profile would be consistent with the total company's profile and if anything just accelerating as we're seeing our higher margin items growing at a faster rate.
And as I break up guys are still there.
Yes, I'm still here.
Thank you for your for the for.
For the answer there.
And anything else we have further questions at this time I will turn the call back to you.
Thank you everybody for joining us today, obviously, we're very excited with our results coming out of fourth quarter and full year with the acceleration we saw it to allow us to how results better than we had expected for the quarter of which then led to better results for the year more importantly, we're extremely excited about the momentum we have going into 2021, where we are.
See another year of significant increases in our sales.
And significant increases in our EBITDA margins, where the management team is estimated our internal budgets to be over $950 million in revenue.
And $100 million and adjusted EBITDA. So we look forward to talking to you in just a couple of months when we report first quarter and the results we have there and thanks again for joining us today on our earnings call for the fourth quarter and full year.
Yeah.
And that does conclude the conference call for today, we thank you all for your participation I kindly ask that you. Please disconnect your lines have a great day.
For.
For those.
[music].
Okay.