Q1 2021 PetIQ Inc Earnings Call
Okay.
Please stand by the presentation will begin momentarily we thank you for your patience and ask that you. Please remain on the line.
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Welcome to the Pet IQ, Inc. First quarter 2021 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 if at any.
During the conference you need to reach an operator, Please press star and zero as 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. Thank you for joining us on pet Iqs first quarter 2021 earnings conference call on today's call are cord Christensen, Chairman and Chief Executive Officer, Susan Sholtis, President and John Newland, Chief Financial Officer, Michael Smith EVP of the product segment will also be available for Q&A.
Before we begin please remember that during the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events 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 for the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Please note on today's call management role for certain non-GAAP financial measures, including adjusted growth profit adjusted SG&A adjusted net income and adjusted EBITDA on the mothers for 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 income.
Niche and presented in accordance with GAAP.
Please refer to todays press release for a reconciliation of non-GAAP financial measures.
Comparable measures prepared in accordance with GAAP. In addition, Pat I keep posted a supplemental presentation on its website for reference.
Now I'd like to turn the call over to cord Christensen.
Yeah.
Thank you Katie and good afternoon, everyone. We appreciate you joining us today to discuss our first quarter financial results today.
And with an overview of our strategic business on financial highlights then Susan will provide greater detail on our services segment and Jon will discuss our financial results finally, Susan John Michael and I will be available to answer your questions.
We are very pleased with our strong start to 2021, we generated record results driven by growth in both our product and services segments.
Our team has done well to execute on our strategic objectives, serving our retail and E. Commerce partners to ensure we are serving pet parents and their pets, where and when they needed to fulfill their pet health and wellness needs.
Q1, net sales increased 36, 2% to $254 3 million.
Adjusted gross margin expanded 130 basis points.
And adjusted EBITDA of $26 9 million increased approximately 86% year over year.
This demonstrates the strength and momentum across our pet health and wellness business day.
During the first quarter, we continued to experience robust velocity growth from both our manufactured and distributed pet products across all sales channels.
Segment net sales increased 38, 3% to 230 million and.
And product segment, adjusted EBITDA increased approximately 60% to $38 8 million, representing an adjusted EBITDA margin of 16, 9% an increase of 230 basis points compared to Q1 last year.
Our services business reached a very important inflection points, where we saw headwinds from the pandemic starting to abate.
For Q1 services segment net revenues were $24 3 million, an increase of 18, 6% compared for the same period last year.
And increased 26, 6% from Q4.
Adjusted EBITDA for $2 1 million for the services segment was up 5% from Q1 last year and increased 10 five per cent compared to Q4.
We estimate that the services segment would have contributed an additional $3 9 million of net revenue and $2 6 million of adjusted EBITDA and the total for the quarter would've been approximately $28 4 million of net revenue and adjusted EBITDA of $4 7 million if the service.
<unk> did not have COVID-19 related impacts.
Through the first half of Q on our services segment rate of Absenteeism was still elevated as we discussed on our earnings call last quarter.
However, as we progressed through the first quarter, we started to experience a welcomed improvement in COVID-19 related impacts as.
As a result, we ended the quarter with single digit temporary closures week to week based on COVID-19 related illnesses compared to 12% for 16% from Q4.
The health and safety of our employees remains our top priority and I want to thank all the members on our team for their hard work and dedication as they continue to be on the front lines, helping pet parents and their pets.
We are pleased that our service organization improvements we experienced in Q1 have continued into Q2, we believe that iqs mission of delivering smarter options for pet parents to help enrich their pets' lives through convenience and affordable access to veterinarian products and services is increasingly resonating with pet parents.
It remains consistent for our business are the robust industry tell wins, including the Humanization of pets and continued significant growth in pet health and wellness categories. As pet parents are taking better care of their pets and looking for ways to save money doing it.
Taking a closer look at our product segment for the first quarter sales were led by our E. Commerce business that was up over 40% versus Q1 last year.
These gains were driven by our manufactured portfolio as our business was up 115%, including cap star or up 63%, excluding cap star for the quarter.
Our team's emphasis on winning on both brick and mortar retail on E. Commerce continues to pay off as we also saw strength in our traditional retail partners larger largely driven by the pet specialty channel, which was up 48 per cent for the first quarter.
From a mixed standpoint, our business on the quarter consisted of 77% distributed and 23% manufactured based on the timing of product shipments to one of our largest retail partners in the quarter.
Our distributed sales mix was slightly higher than our anticipated full year mix, we expect our manufactured mix to increase for the full year to approximately 26 per cent of sales.
Barak you participate on several of the largest fastest growing categories within the pet industry, such as flea and tick solutions and health and wellness.
As these categories have evolve both in size and sales channel, we are purchasing market data to better reflect our understanding of the categories. We compete in.
As I've noted previously our ecommerce day that comes from a broader Nielsen report and data from our partner of IRI known as 10 10 data for.
For the 12 weeks ended March 27, 2021, these datasets show that flea and tick category growing 14% and is pacing to eclipse the $1 $5 billion market across retail channels, we compete in.
And I accused flea and tick manufactured brand portfolio outpaced the category by growing 16%, while picking up 31 basis points of share in the first three months of 2021.
These share gains were driven by the E Commerce channel, where our brands grew 41% year over year.
Our performance in this fast growing set of customers was fueled by the cap Star brand, which was up 49% along with pet on her plus which grew 44%.
But like you continues to lead the fastest growing for them within the flea and tick category oral treatments. In Q1. This segment grew 27% with Pat I accused brands growing 33% and continues to be a growth driver for our portfolio and also for the broader category.
Momentum is expected to be maintained as we head into the peak selling season for the year.
Q1 was our second full quarter of having cap star in our portfolio and once again delivered results for outperformed our expectations for the first quarter of the year. The caps. Our brand grew 35 per cent and consumption across all measured markets, making it the fastest growing offering within the top 10 OTC brands in the industry and is now the number.
For brand in the flea and tick category.
Even as we continue to make investments to strengthen the cap star brand, we have a clear line of sight to conservatively achieve our stated goal of greater than $20 million of incremental EBITDA contribution from cap starting 2021.
This will further drive our products segment margin improvement based upon our Q on results and full year 2021 projections on the brand for.
For the 12 weeks ended March 27 2021.
Based on the same Nielsen plus 10, 10 dataset for pet health and wellness category grew 33%.
And are now also on pace to eclipse, a $1 $5 billion market in the OTC product segment for 2021.
Pet IQ brands grew nicely at 29%, yet we trailed the category due to just beginning to build on our portfolio within E Commerce segment, where the category is growing 47%.
We view this on a strong incremental opportunity as we move forward.
As discussed on the last quarter's communication, we plan to launch an advanced product line in the back half of 2021 to better position us to compete within the e-commerce and direct to consumer channels for pet supplements.
These types of premium offerings or what is let ecommerce to become dominant across the market within health and wellness. We are excited to begin participating on this segment and to provide our loyal consumers, an even better options to meet the needs of their pets.
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 the new credit facility, we entered into in mid April to support our future growth.
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 previously we continue to maintain our internal budget of approximately $950 million in net sales and over $100 million and adjusted EBITDA with the only significant variables to this plan being.
COVID-19 related impacts affecting our services segment results.
As we look at the year in total we expect to generate approximately 57% of our total net sales in the first half of 2021 and approximately 60% of our full year adjusted EBITDA share.
For two years prior Q2 will continue to be our largest net sales on adjusted EBITDA quarter for <unk>.
Balance of our net sales on adjusted EBITDA will be weighted to the second half of the year keep in mind, we begin to lap the additional cap star in August of 2021.
We maintained great visibility into our products segments and expect it to help us fuel and other Europe significant margin expansion and adjusted EBITDA margin expansion, demonstrating accelerating profit leverage of Cat IQ we.
We expect to generate further improvements on our services segment as the year progresses, and we are optimistic that with lower minimal rates of absenteeism and other COVID-19 related impact. We will then be in a better position to provide formal annual guidance. In summary, we are off to a strong start in 2020, one we believe that iqs differentiate it.
Position on the animal health industry will continue to fuel our long term growth, we expect to continue to benefit from rising pet adoption increases in dollar spend per pet and an emphasis on affordable convenient pet health care.
All great industry tailwind for us.
We believe that IQ remains well positioned to capture a disproportionate amount of the industry growth as we move forward with our vertically integrated product manufacturing and distribution platform and a national footprint of convenient and accessible veterinarian services with that overview I would like to now turn the call over to Susan.
Thank you card.
In the first quarter of the year, we continued to shake off the impact of COVID-19 on our services business as the country welcome the new year with renewed energy and hope Q1 remained a roller coaster as COVID-19 uncertainty for many consumer facing services businesses.
COVID-19 infections peaked in mid December and death rates peaked in early January and all the while our team was operating safely and effectively to fulfill our mission of providing affordable and convenient veterinary services to pet parents.
Even though 56% of the U S workforce, we're still working remotely in January and the mobility of the U S. Consumer was 35% below pre pandemic levels, our clinics for open and serving pet parents I would be remiss if I didn't thank our team for their incredible energy and drive in Q1.
That energy and drive helped us to deliver once again sequential improvement in our performance metrics for Q1.
As we emerge from COVID-19 related impacts in our services business, we've been focused on generating consistent improvement in our financial results compared to the prior quarter.
Keep in mind, historically, our fourth quarter and first quarter typically represent similar veterinary service results based on seasonality.
I'm proud to report that we continued to have double digit growth in all of our key kpis for Q1.
Importantly, our total pet volume was up over 20% versus Q4, and our dollars per clinic were up over 15%.
Finally, the number of clinics, we operated in the quarter continued decline up over 10% versus Q4 as demand for wellness Veterinary services grew.
Importantly, we saw an inflection point in our results as the key headwinds we experienced as a result of COVID-19 started to abate.
Specifically, we experienced a dramatic slowing of absenteeism, which as a percentage of total clinics held has dropped into the single digits for the first time since the pandemic began.
This is just another great sign our services business has stabilized and is poised for continued growth.
Our growth also continues to outpace the overall veterinary service market and we are incredibly pleased to see that in total nationwide veterinary clinics are busy.
This is a great indication of the strong tenant industry tailwind.
In Q1, our team also connected with more pet parents virtually than ever before.
Call volumes alone skyrocketed in Q1 versus Q4 by over 100% with most of the colors wanting to find their nearest clinic location.
In addition, our telehealth calls grew by 24% versus Q4 with most of our pet parents asking to discuss their pets symptoms as they continued to manage their pets' health and wellness needs from home.
We kicked off our 2021 wellness center build out in January and celebrated the opening of 13 new centers in Q1, we.
We continue to expect our total wellness center build out for 2021 to be in a range of 130 to 170, new wellness centers, we expect our new unit growth to be evenly weighted between the first half and the second half of the year and as I've mentioned previously with 60% of our new wellness centers representing conversions.
For mobile clinics, and 40% of our new wellness centers to be Greenfield locations.
In collaboration with our retail partners on which we operate we also kicked off our combined marketing plans for the year on March.
We spent considerable time during the pandemic developing collaborative plans that tackled geo marketing at a very local level and leveraging our respective marketing expense to optimize pet parent reach.
As mentioned last quarter. There are two initiatives that we are particularly excited about and continue to monitor closely.
Our first initiative is focused on attracting new pet parents. During these complex times. We are excited to again reported that this initiative is working in.
In Q1 50 per cent of the pet parents that utilized our services were new to pet IQ.
Recall, we also experienced a similar rate of new pet parents, using our services in Q4.
Pet parents are clearly coming to pet IQ for two reasons affordability and convenience.
Our second initiative is focused on our smart care wellness plans, which we launched nationwide in Q1.
We are excited to see the positive initial traction from this program with over 7% of our pet parents purchasing this plan.
Smart care wellness plans provide pet parents and affordable way to care for their pet annually for a low monthly fee.
Another benefit to our smart care wellness plans is that we generate three times the revenue and margin when pets are on this program versus our average.
We look forward to providing you with more updates on these two key initiatives as the year progresses.
Finally.
As we get back to more of a pre pandemic operating environment in our services business, we expect to benefit from greater efficiencies.
The health and safety of our employees, our retail partners, our pet parents and their pets remain our top priority period.
As more of the U S population becomes vaccinated and certain COVID-19 related restrictions and regulations are eased. This means that we can reintroduce certain services that we temporarily suspended.
On to staff, our mobile clinics and wellness centers similar to how we did prior to the pandemic.
Sample.
Mailed trends.
We removed the service in March of 2020, as it was deemed an essential service by many states counties and the AVMA.
By restarting this service our total pet count will increase dramatically and it will also improve margins.
Another example of clinic staffing.
During the height of COVID-19 to help manage crowds in line and to ensure appropriate social distancing and our retail partner stores. We brought in additional staff to assist with pet parents flow management.
This increased staffing well necessary wasn't added cost that we expect to reduce as the year progresses.
We believe we have a great opportunity to gain more operational efficiencies like this throughout the year that will benefit our sales and our overall profitability.
In closing pet IQ is in the right place at the right time.
From the pet industry perspective, 32% of dog and cat on nurse, who consider their pets as part of the family are concerned about the affordability of routine health care for their pets.
We know that pet parents are seeking out solutions for affordable veterinary care at increasing rates.
The good news is that our pet IQ, we're open for business and remain focused on our mission of providing millions of pet parents with the affordable veterinary care they desire.
With that I'll pass the call over to Jon.
Thank you Susan we were pleased with our strong start to 2021.
Could IQ generated record net sales of $254 3 million, an increase of $36 two per cent compared to last year.
This increase was driven by continued product segment growth, including contribution from cap Star. We also benefited by approximately $15 million from a shift in the timing of our seasonal flea and tick product order into Q1 from the second quarter of this year.
Even with this shift in timing Q1 sales were greater than we anticipated Inc.
Total product segment sales were $230 million up 38, 3% compared to the prior year quarter.
The services segment contributed $24 3 million to our consolidated net sales in Q1, an increase of 18, 6% from the prior year quarter.
This reflects new wellness centers sales contribution as we lapped COVID-19 related closures that started in March of 2020.
Importantly, as both Gordon and Susan mentioned, we were very pleased with the significant improvements in the services segment results as the impacts from COVID-19 were the lowest we've experienced since the onset of the pandemic.
We estimate the services segment would have contributed an additional $3 9 million of revenue without any COVID-19 related headwinds in the quarter.
Yes.
First quarter gross profit increased $48 seven per cent to $47 8 million and gross margin increased 160 basis points to 18, 8%, even as we experienced an estimated 74 basis point temporary headwind from COVID-19 related impacts in the services segment.
Adjusted gross profit was $51 8 million and adjusted gross margin was 27 per cent for the first quarter of 2021, representing an improvement of 130 basis points when compared to the same period prior year.
First quarter 2021 general and administrative expenses were $40 7 million compared to $31 7 million in the prior year quarter, an increase of $9 million.
Adjusted General and administrative expenses for $36 7 million compared to $26 7 million in the prior year period, an increase of $10 million.
The company did recognize $3 8 million of amortization expense associated with the onetime noncash write off of in process R&D assets.
As a percentage of net sales adjusted SG&A remained flat to prior year.
Our strong sales growth combined with our increasing gross profit helped us achieve adjusted EBITDA of $26 9 million, an increase of $85 eight per cent compared to Q1 last year.
Adjusted EBITDA includes a benefit of approximately $1 5 million from the shift in the timing of the seasonal flea and tick quarter that I previously mentioned.
We also had a $2.5 million shift in the timing of R&D and other expenses to the second quarter of 2021 from the first quarter of this year.
After taking these two items into account our consolidated adjusted EBITDA came in better than our plan.
Adjusted EBITDA margin expanded 290 basis points to 10, 6%.
From a segment perspective product adjusted EBITDA increased 15, nine 8% for $38 8 million services segment adjusted EBITDA increased to 100000 from Q1 last year to $2 1 million.
We estimate that the services segment would have contributed an additional $2 6 million of adjusted EBITDA. If all existing services locations did not have COVID-19 related impacts in the first quarter.
Turning to our balance sheet and liquidity.
As of March 31, 2021, the company had cash and cash equivalents of $11 1 million.
Our long term debt balance, which is largely comprised of its revolving credit facility term loan and convertible debt was $442 2 million as of March 31, 2021, with total liquidity of approximately $66 6 million before the finalization of the new credit facilities.
Interest in April a $425 million.
The credit facilities provide more favorable terms, including 125 basis point decrease in our annual interest rate on the company's term loan and greater flexibility to support future growth, representing total liquidity of $125 million as of April 19th 2021.
Working capital increased to $193 2 million as of March 31, 2021, primarily as a result of the normal working capital increases and they are in inventory given the seasonality and the success of the business.
Our available liquidity consistent positive contribution from the product segment, a significant improvement in the services segment puts pet IQ and are positioned 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 Q2 or annual 2021 guidance due to the uncertainty from potential COVID-19 related impacts on our services business.
The solid improvements across our services segment that Susan highlighted we continue to give us confidence in our plan to open 130 to 170 wellness centers on 2021.
We are optimistic our services business has reached an inflection point and we will continue to see improvements in Q2.
We expect our services segment results will become more predictable and then we will be in a better position to provide formal annual guidance.
Looking at the product segment, we believe we continue to have strong visibility to another year of solid sales growth and adjusted EBITDA margin expansion.
We remain confident about the incremental growth potential for cap star as compared to when we completed the acquisition.
And we believe our greater than 20 million of EBITDA contribution from cap Star for 2021 is very achievable.
In closing we're extremely pleased with our strong start to 2021, a record net sales and adjusted EBITDA are a testament to the strength and agility of our entire team that continues to execute well in a.
Dynamic operating environment, because we continue to benefit from the robust pet health and wellness industry tailwind.
With that overview cord, Susan Michael and I are available for your questions operator.
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One moment please for the first question.
Yeah.
Our first question comes from the line of David at Westenburg with Guggenheim Securities. Please proceed.
Hi, Thanks for taking the question and congrats on a really strong quarter here on so.
So, let's first start with on clinic opening cadence I think you said in the commentary that you'd see first half and second half being about the same that would imply 30 60.
If there were $61 30 is the number I would imply 65, and 65, which would imply something around 50 in Q2 on <unk>.
On a fair way to look at that is that David Indeed hear you on a case that you'd first half and second half would get receive assume you'd opened the same roughly the same amount of clinics and I'll wait nasdaq's one.
Hey, David It's Suzanne. Thank you for the question, we are absolutely on track towards delivering our commitment for clinics with our target of opening the half of the clinics in the first half and half in the second half for the way that you're looking at it is absolutely correct I think we've proven at left back in 2000.
And in 19, our ability to open 80 clinics in fourth quarter. So we are we are well on track to hitting that number. So that you can probably imagine I'm, stating the obvious that we are incredibly busy this quarter.
I would also add to that though that we are we're collaborating very closely with our retail partners probably at an enhanced level more so than ever before because of the nationwide challenge.
Managing building material availability and labor availability.
But we continue to work through those challenges together and and what I do want to emphasize is that we have 100 per cent of our clinic committed this year. We have the dresses we have clinics committed so theyre done now we've just kind of get on to building them, but I think working in collaboration with our partners, we will get us there, but youre thinking about it correctly.
Okay. No that's great color on I know traditionally pet IQ has talked about the ramp up phase, where there's marketing spend et cetera. So you've used to like to open up around you know I think it was Q4 is an end in Q1, I think Q2 was a little bit of departure can you talk about the seasonality in the services business do you think maybe with some of them.
7% Smart care may be you can.
Maybe maybe you get a little bit more balance than maybe historically, you've seen although I do tend to think of of wellness services being kind of a springtime activity on and I'll I'll wait till I got one more.
Yeah, I think a couple of different things first of all.
You and I, both tend to think of wellness as being a springtime event.
This year is different I think last year was different and so I think we're going to continue to see those wellness services pushed out I think the pet parents are continuing to wait I think they are also continuing to have a hard time to get into their full service veterinarians. So I'm not concerned about the build out in second quarter at all as we spoke of laughed at last quarter.
For our wellness plans continue to be an incredibly important part of our strategy as an organization and I think are really going to be welcomed for pet parents, especially those that are challenged financially.
Coming out of coming out of COVID-19. It provides them with an offering that.
Is is gonna be best beneficial for both them and to their pets.
Got it Greg I know our data on terms of backup appointment backups kind of supports that same exact conclusions. So that makes a lot of sense. I guess my last question is always on channel consumer changes around Soares snowfall on USA. Today article did you see any changes in terms of.
Uh huh.
Customers going from collars to maybe topical or even oral such as cap star on just yet, but just kind of gauge is see if there was any maybe benefits on that that could happen with that and I'll jump off line after that thank you.
Yeah, David I think I'll, let Michael take that question he's close to watch for the industry data for their color specific day. So go ahead Michael.
Yeah, David we monitor both the activity with consumption and feedback from consumers around the initial USA today article and then a follow up on CBS and for.
For a couple of days there were some minor noise in the consumption data, especially those partners, we get a clear read from basically daily if not weekly like our top e-commerce and brick and mortar retailers. So they weathered that storm very well, we haven't seen a lot of forms shifting from callers to topical or candidly within the call.
Segment out of this rest of the brand into other brands.
So I wouldn't say, it's a non event, that's always kind of a continuing development as those things play out but to date they have not seen a significant impact.
From those publications.
Thank you so much.
Okay.
Our next question comes from the line of Steph Wissink with Jefferies. Please go ahead.
Thank you good afternoon, everyone I have one follow up question Susan for you on the services segment I'm wondering if you can just walk us through the step function economically when you move from a mobile clinic to a health center, just remind us what that benefit is in terms of revenue on volume and then I think for the prior question just how we should think about the contribution.
Margins as they kind of come back out to the back side of COVID-19.
Yeah. Thank you for the question.
I'll I'll start just by talking about the conversion so in the end the conversion clinics.
They ramp faster to for lack of a for something more concise to say they they ramp faster because we've already built on the <unk>.
On the Intel so when we take a mobile unit, we tends to increase the frequency that we go to that retail outlet.
And.
We will start out once a month, we then we'll increase the cadence too.
For once a week and then sometimes also multiple times a week once we get up to a certain pet count. It makes it makes complete sense to convert that into into a wellness center.
Cause what we what we see is that we get an immediate impact on pet count.
Cause people know that we're there they're used to us being there and again, we built up that complete.
That complete clientele.
In regards to margin improvement our expectations are that in the second quarter of this year that we will we will see margin improvements on our business because as we do layer.
I would say COVID-19 COVID-19 related items from our processes and our procedures.
Of course, we're going to continue to focus on keeping our teams safe, but but that would be layering process helps us to operate faster and that's literally where we are right now in regards to pet because we've got to continue to get faster. So as we do layer the.
On the items that are that are keeping us from from.
Implementing the speed that we usually operate in that's just it's slowing us down it just but it wasn't the time now now now is the time, just because of the vaccination rates going up et cetera, but that prior to this it was all about just making sure that we can take continued to keep people safe.
Safe.
Okay. That's helpful. And then cord one for you is just on you teased out the notion of a health and wellness product range that you have planned for the second half of the year related to supplement I'm wondering if you can just help us connect that to your comments on 23 per cent of the business in the first quarter on manufacturing and do you expect that to kind of average out around 26 for the year.
Is that health and wellness initiative, one of the key points of that bridge or is there something more in the manufacturing side.
Thanks for the question stuffs.
Our budgets for the full year, how does that 26% and we knew with the size of a significant fill order for one of our large retail programs for the play into a category in the first quarter second quarter that there was a chance that.
If it was the ship in first quarter that first quarter could be a little bit softer for that day.
The 26%, we feel we have great visibility too and it does not include the launch of that program involved on that that would be incremental to that.
Anytime you have a new launch you're concerned with outside vendors and their ability to supply.
Materials for those and so we try to let the first quarter or second quarter or even sometimes other new new item launching before we can really see it success be an instrumental part of our overall projections. So without that program. We feel strongly we are still on track to be able to gain a full point of share.
With our manufactured items based on just how the they're growing and contributing and we see full year being at 26 per cent or better and it's going to be part of our margin expansion and part of the earnings expansion that we've been talking about all all your during 2021.
Very helpful. Thank you everyone.
Thanks, Doug.
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Our next question comes from the line of Jon Andersen with William Blair. Please go ahead.
Hey, good afternoon everybody.
Couple of questions maybe.
Maybe starting on the service business.
I guess.
Can you talk a little bit about.
<unk>.
What's going on.
What you are highly confident in in terms of maybe the $1 30 to $1 70 for the year.
Maybe it's kind of the.
Recovery, you're seeing in pet counts kind of where youre seeing maybe upside for more encouraging trends relative to.
Initial plan.
And then also on services, if you could talk a little bit about are there any things that you're really trying to you're having to kind of manage more closely and I'm thinking about things like you know.
<unk> availability.
Staff, the new clinics for.
For to your point, Susan earlier, the availability of resources and materials to get that.
Kleenex kind of setup, so just a little bit of maybe what's working better than thought and what are you having to kind of maybe manager watch closely.
Hey, Jon Thanks for the question good to hear voice.
Some of it I'll, let Susan zone.
You know first and foremost are the most exciting thing we saw in the first quarter was.
Actual inflection point, where we saw.
No longer is it basically trending at the bottom of the trough and we started to see us coming out of the trough in all the key variables that affected our margins that were in the mid to high Thirty's.
Took us down into the low twenty's, we could point to each one of those and say okay. We're seeing improvements we're able to now manage our way through those items and actually run the business to see those improvements. So what we're excited about is.
Whether it's the number of clinics that were running some other procedures that limits the quantity of pets that we could have seen.
If it's labor all the things that are involved with the P&L were seen.
We can get back to running the business and seeing the results that come from those business. So we're excited about.
A lot of things right now just to have an inflection point, where it's time to dig back in in and run the business. So that the team has put together an extremely good plan to watch those variables track on weekly.
Saw good improvement in Q1, we're already seeing even better improvement in Q2 and feel like we're on track to get back to our normal kind of kpis across all.
All items cost and revenue generators over the next couple of quarters. So we're pretty excited about what we're seeing there.
Challenges are still out there, we're still coming out of COVID-19 and we still have absenteeism, although it's down to a single digit number versus 12% to 16%. We saw before that's a huge improvement that Intel its back to zero, where we were at pre COVID-19.
The challenge.
Look veterinarian labor is always tight, but we did a very good job on managing it would be also a concern, but I think really just seeing that we're having people come to work that we're not having the absenteeism. It goes to zero and the vet labor is able to be continue to get easier and easier like it was pre COVID-19.
There's going to be areas that we're gonna be watching closely I know Susan anything else you'd like to add.
No I think you covered everything Jon I think that debt overall that our ability to increase the number of pets that we see and improve our margins is really where our focus is and and and we will see great improvement moving into Q2.
That's super helpful. Thanks.
Just a couple of metrics also on the service business.
You mentioned that I think half of the customers that youre seeing pet IQ, you'll see or are new to the franchise new to your business.
Do you have any sense for.
What portion of.
The customer basis, maybe.
New to the category, meaning they haven't.
Seen a vet regularly so I'm trying to get a kind of a sense for how much of this is maybe incremental.
Versus share shift and then secondly on the smart care program.
I mean, it's pretty amazing that you see sales and profitability.
Three times debt when you're on smart care vs versus not.
How are you thinking about like what what are your internal targets for smart care at 7% kind of a level that you think you're very happy with and want to see continue or is there a business case for that to be significantly higher and how can you help drive that.
Yeah.
Thank you you know I'll I'll start at the very top in regards to new pets, we can't quantify it because we've been measuring the 50 per cent that are coming to us are not those pet parents that are that haven't that haven't received a veterinary care, which which makes sense. When you. When you take a look at what's happening in your.
Full service for veterinary clinics and that arent able to see the number of pets that are presented to them every day because of a lot of their for their curbside service protocols.
So we actually there are full service veterinarians that are recommending that their clients come to us for their routine care on their vaccinations, because they're spending time, taking care of the more serious cases. So so the new pet parents that are coming to us are actually being referred to us which is great. It's a great collaboration with veterinary clinics across.
The country. So we will continue to work on that relationship as well because of the service that we provide really helps them to focus on on the more critical cases in.
In regards to the smart care plans I would be ecstatic at 7% the rest of the year because when you take a look at.
Competitive clinics are full service clinics in the marketplace.
Is there a subscription rate is around 4% to 5% so for us to come out the door at seven per cent and continue to maintain that I think is is is tremendous it. It is an important part of what we're doing.
It also just answers the need of what COVID-19 pet parents are experiencing in regards to their ability.
To outlay.
On the financially all at one time and they prefer to make this the smaller monthly payments in order to be able to to have their pet care for.
Yeah, Congrats on the success of that so far.
Last one for me, it's a little bit of housekeeping, Jon I think the dress. This on the prepared comments, but I want to make sure I'm clear on it there was a pretty significant step up in DNA sequentially in the quarter.
Is that whats the source of that and is that just kind of onetime in nature related to this write down or is that something that.
Is this level something that will be maintained thank you.
Yeah, there's two different things to take into consideration there Jon we talked I talked about the write down of the in process R&D.
That we did was $3 8 million and then we also had increased.
Increased amortization associated with capstone.
And so those are two.
Specifically identifiable that.
When you factor those out her our dollars are still up on a percentages or are way down as a result.
Thank you for.
Good luck.
Our next question comes from the line of Joe Altavilla with Raymond James. Please go ahead.
Thanks, Hey, guys good afternoon.
So just sticking on the services side for a second obviously, it's encouraging to see Apatheism going down if you could remind us I know you didn't give official guidance for this year, but in terms of your budget. What were you assuming in terms of absenteeism I think you were assuming and correct me if I'm wrong, but you wouldn't see a significant vicki.
And that number until the second half of the year.
Hey, Joe it's cord, if you remember when we gave our original internal budgets.
Did not contemplate the negative impacts from.
COVID-19 on our service organization that we would let you know what that impact was that that didn't happen in the quarter and so from a budget perspective.
We budget as if we would run with no impact from and communicate what the impact was against the budget.
And we let people know that if we budgeted it to be in the double digits through the third quarter that we thought we could see upwards of $10 million plus in revenue impact from 5 million plus of of earnings impact, we're seeing trends and align that says it.
Should be better than that.
So we're excited about is the case this quarter, we saw a two and a half a million dollar impact to earnings that was in the budget for the service organization, we definitely see that being a significantly lower number in Q2 and Q3 so.
Plus the business is doing better in other areas. So we're overcoming a lot of that negative impact with our product business performance and margin expansion. So we're feeling very good about our budget, we're feeling very good about our internal budget of the 950 on the hundred.
And obviously the quarter results were fantastic for this quarter.
Got it that's helpful on just the secondly on it.
The number of wellness centers that you guys expect to fill this year the $1 30 to $1 70.
What determines where you end up on that continuum. It sounds like it sounds like labor is sort of the gating factor, but are there other.
Items that would keep you from being towards the upper end of that range for example.
I think Susan referenced it in her conversation and comments that we.
We have great retail partners, but we have a number of our retail partners that are building out the space for us.
And they've had some challenges delivering the stores to our suite of access to building materials and labor on the construction side.
They're all working very hard they want the locations. They want all the locations. So if they are able to deliver those locations will be able to open and operate them.
With what is going on out in the marketplace. We are doing everything candidate for the upper in but again, having some challenges on that one area of the business, but we'll be ready from our side with the needed people to operate the locations and in the locations where we're in control of the construction, we will get them delivered.
Okay. Just one last one if I could for Susan and I apologize if I missed this but could you guys talk about the productivity numbers again.
Got Ya wellness centers and community clinics, how close you are to where you were pre COVID-19 for example on on a pet count basis.
Okay.
Yeah, no. So I think that I can say that we are back to delivering very solid kpis versus 2019, because 2020, it really becomes almost a useful data point for us at this point, but we're improving in all metrics with the exception of pet count right now which is relatively flat.
It isn't a surprise to us because of the additional requires that we layered in as we reopened through COVID-19.
And compared to the veterinary industry as a whole.
For pet count is down again because of the layering in of COVID-19 processes. So we are we are outperforming the industry, but if you take if you compare to where we were in 2019.
We've improved everything double digit with the exception of that pet count, but that pet count will improve as we do layer.
So for head count is flat with 2019 as what you are saying correct, yes, okay perfect. Thank you.
Our next question comes from the line of Bill Chappell with Trust Securities. Please go ahead.
Oh, Hey, thanks, good afternoon.
Wanted to just on the services side I guess.
I understand the the you know the reason for absenteeism over the past year and I understand the reason for being conservative going forward, but at what point does the absenteeism turned into unemployment and when I say that is share as vaccinations go higher as things reopen.
At what point do you no longer tolerate absenteeism or should we expect that some teams them to go to zero because it seems like it's.
Sooner than later and I just didn't know if it.
Maybe not maybe you're planning on just letting it run.
As is in and run its course, but any commentary there.
That's a good question Bill good to hear from you I think you have to first appreciate that most of the absenteeism. We're having is in our community clinic business, where we have 10 99 employees and I definitely without the vaccines out there.
From our survey and understand what's going on.
Seeing that those employees that don't feel like they have that strong commitment to the company or are able to feel good about taking time off and we do feel that the first sign of seeing it take such a significant drop in absenteeism is them getting confident through the vaccination for other things but.
We are confident that we will get back to where all clinics that are scheduled will be stopped.
We had years and years of never having a clinic canceled for not having a labor. So we don't think that's the case, we think we've seen the first sign that we're gonna be returning back to a good place very soon and I don't know if Susan anything else to add but that's how I would see it.
Yeah, No I don't I don't have much to add to that bill. It's a good question, but.
But with absenteeism, the majority of that especially when you take a look at last year and even into January of this year was due to illness, so and illnesses illness, and we allowed people obviously to go away for the appropriate quarantine time in order to be able to manage through them.
Through their COVID-19, so.
Again, I think as the country becomes vaccinated, we're going to see less and less of that.
So bluntly, yes at some point in time, we will get to zero, because there'll be no COVID-19 illness did I say that Atlas.
[laughter], let's hope.
Second.
Second question, just more color on on Cat start I mean, it seems at least from our checks that day.
The distributions.
Proliferating through most of the retailers, where you were already shipping your own products or distributing third party products Inc.
Give us an idea and I'm sorry, if you already gave us kind of where we are on a C V and you know if if the March quarter results were more of kind of fill in because it you know.
It was obviously good growth and good book before even the start of the flea and tick season. So just trying to understand what potential there is as.
As we move through the year for that business.
Michael you want are going to take that one please.
Yeah.
In general the brand continues to be very healthy if you look at consumption in the quarter. It was the fastest growing brand of the top 10 brands.
In the category largely fueled by success in E Commerce.
However, we do continue to pick up points of distribution.
Retailers that we had some business in for example, they carried on the two burdens of our dogs skewed, but not the cash given we've been adding to cash SKU in at those planet Graham's on modules have been updated and revised in Q1 and some of that still to play out in Q2.
From an ACB perspective, I'd have to get you an exact number but in measured markets I would say cap star is now north of 75% pushing 80% of HCV and really the delta between there and 95% to 100% as that cash SKU.
It's been a big focus of our team on the field working with our retail partners as they get that cash you added and it has shown to be very incremental for those customers who have brought it into other assortments.
Okay.
Got it and is that I mean, any idea of what it was a year ago or is that is that fairly similar to those at the levels for the year ago.
Yes, I would say, it's slightly up from a year ago call. It from 70 to $75 77%.
Year over year Q1 percent ACB 2020 to 2021.
Okay, great. Thanks, so much.
Thanks Bill.
Okay.
There are no further questions. So I'll turn the call back over to Mr. Christiansen. Please go ahead.
Thank you everybody for joining us today.
We're extremely excited about the strong start to the year and the momentum. It has created as we go into the rest of the year for product business accelerated and delivered 38% year over year growth. Our service segment saw an inflection point, we've been waiting for it to be able to start running our business and it led to us having a <unk> 36 per.
Net increase overall for $254 million in sales significantly above our expectations for the quarter and with adjusted EBITDA of $26 9 million or 85, 7% better again, a fantastic start for the year for the company. We're so grateful for all of our associates employees and other participants on partners and REIT.
Sales partners that have helped us deliver these great results and look forward day very successful.
And the rest of our year and we look forward to interacting with all of you throughout the year. Thank you everyone.
Thank you that does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect your lines.
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