Q2 2021 PetIQ Inc Earnings Call
[music].
Ladies and gentlemen, and welcome to Pet IQ second quarter 2021earnings conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation should anyone require operator assistance. Please press star zero on your telephone keypad and now my pleasure to introduce your host Ms. Katie Turner.
Afternoon. Thank you for joining us on pet IQ2021 second quarter earnings conference call and webcast on.
On today's call are cord, Christensen, Chairman and Chief Executive Officer, Susan Sholtis, President and John Newland, Chief Financial Officer, Michael Smith, Executive Vice President of the product and they didn't 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 and these forward looking statements. Please refer to the company's annual report on form 10-K, and other reports filed from time to time on the Securities and Exchange Commission and the company's press release issued today for each other.
Cash and other risks that could cause actual results to differ materially from those expressed or implied and 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 and isolation or as it is.
That's it for the financial information presented in accordance with GAAP. Please refer to today's release for a reconciliation of non-GAAP financial measures and the most comparable measures prepared in accordance with GAAP. In addition, paddock use proposed supplemental presentation on its website for reference and.
And with that I'd like to turn the call over to cord Christensen.
Yeah.
Yeah.
Thank you Katie and good afternoon, everyone. We appreciate you joining us today to discuss our second quarter financial results.
Today, I'll begin with an overview of our strategic business and financial highlights and Susan will provide greater detail on our services segment and <unk>.
Jon will review review our financial results.
Finally, Susan John Michael and I will be available to answer your questions.
We generated record second quarter results, demonstrating the strength of our diversified pet products and services offering.
And was our highest net sales quarter, the best gross profit dollar and gross margin quarter as well as our highest adjusted EBITDA quarter and the history of the company.
We accomplished this even as we continue to operate in a dynamic environment, where we are still experiencing impacts from COVID-19.
Prior to go on through the results I want to remind everyone that the second quarter was a very unique quarter for the company last year and this year last.
Last year, we had significant 1 time sales increases when pet parents purchase more of their pet prescription drug products via our E. Commerce partners due to stay at home orders and our services segment had all community clinics and wellness centers close yeah.
Year to date Covid had additional anomalies that have affected the timing and overall results for the quarter.
Our ecommerce customers purchase inventory and Q1 and participate in Q2 volumes closer to the second quarter of last year.
However, when the veterinarian channel reopened our ecommerce customers return to their pre COVID-19 growth rates, it's still very strong.
But much less than last year.
This caused them to have excess inventory from the Q1 purchases base.
Based on these fluctuations we think it's important for you to take into account. The 1 time nature of volume and 2020 and look at our year to date and 2019 performance to accurately see our results and growth.
Q2, net sales increased 1.5% to $271 million.
Year to date and net sales increased 15, 8% to $525.4 million and when you compare our year to date and net sales for the same period and 2019, our net sales increased 42, 3%.
Adjusted gross margin expanded 570 basis points and and.
Adjusted EBITDA of $34.4 million increased approximately 21% year over year.
Our team has done well to execute on our strategic objectives to ensure we are serving pet parents and their pets, where and when they need it to fulfill their pet health and wellness needs.
Taking a closer look at our product segment.
Sales were pressured in the quarter by the impact of a pull forward of flea and tick season, all programs to Q1 from Q2, this year, representing approximately $15 million and net sales.
Along with lapping unusually high sales and the second quarter last year from the benefit associated with a shift and mix of sales to the E. Commerce channel from the veterinarian channel due to COVID-19, and more pet parents purchasing and prescription drug products online.
And everyone looking at our year to date results, you'll see a clearer picture of our performance for the first 6 months of 2021 and our product segment increased 9.8% compared to the same period last year.
This growth rate is even more impressive when you consider that it is against record volumes associated with the channel shifts that occurred in 2020.
Taking this a step further for comparison purposes. We also wanted to look back to the first 6 months of 2019 and a pre COVID-19 environment on.
Our product segment net sales increased 47, 5% for the first 6 months of this year on a 2 year stack basis.
From a mixed standpoint, our business and the quarter consisted of 72% distributed and 28% manufactured sales. This compares favorably to our Q1 mix of 77% distributed and 23% manufactured sales and 2 our 2020 mix of 75% distributed and twenty-five.
[noise] percent manufactured sales.
This shift and mix towards our own product portfolio drove a significant increase on our overall profitability and.
Adjusted EBITDA margin expanded 400 basis points to 19, 8% from the second quarter last year.
Our strong margin profile played a key role on the product segment delivering better profitability than we expected for the second quarter, even with a slightly lower net sales or product sales mix trend of approximately 72% distributed and 28% manufactured sales is more indicative of our go forward sales model, which we expect.
And to maintain and the second half of the year, helping us to sustain the higher product segment EBITDA margins than we delivered in Q2.
But like you participate and several of the largest and fastest growing categories within the pet industry, such as flea and tick solutions, along with health and wellness.
Our team's emphasis on winning and both brick and mortar retail and ecommerce continues to pay off as we have seen strong share gains across our manufactured products and both channels.
For the 26 weeks ended June 19th 2021 the pet IQ portfolio gained 85 basis points of share with them playing to this share gain was led by our brand pet armor, which was up 13% for the same period.
Yeah.
As for health and wellness. We also gained 21 basis points of share as the robust growth and the category continues this segment increased 41%, while our portfolio increased 46% over the first 6 months of the year we.
We believe these share gains will accelerate in the back half of the year as we start to ship new programs across the market leveraging our assets and this space.
Shifting to our services segment.
Call and Q1, we noted that our services business reached a very important inflection points, where we saw headwinds from the pandemic starting to abate.
We continue to see sequential improvement on our results in Q2 from Q1 with the reopening of our wellness centers and mobile clinics as compared to the prior year. When we were closed due to COVID-19.
Service segment net revenues increased 15, 9% compared to the first quarter of 2021 and this growth was partially offset by running fewer than expected community clinics as a result of labor shortages.
While our rate of absenteeism improved and resulted in low single digit closures week to week based on COVID-19 related illnesses and new issue labor shortages and began to translate into an unexpected number of closures as we started to play and for a more normalized pre pandemic community clinic schedule.
For example, and the second quarter of 2019, we ran nearly 17005 hundred community clinics versus approximately 15100 community clinics and the second quarter of this year.
The number of community clinics open was down mid teens on a percentage basis compared to our expectations for the second quarter.
And this impacted both our net revenue and profitability and the quarter as the mis revenue from our community clinics, we were not running and reduce our overall operating leverage and the quarter.
While services segment adjusted EBITDA increased 42, 9% compared to the first quarter of 2020..1 we estimate that the services segment would have contributed to the second quarter and additional $12.6 million of net revenue and $5.1 million of adjusted EBITDA due to COVID-19 related impacts to the company's community clinics.
And delay and wellness center build outs.
For the first 6 months of the year, we estimate that the services segment would have contributed an additional $20 million of net revenue and $7.7 million of adjusted EBITDA when taken into consideration and the same impacts.
While we expect the labor situation to continue near term, we believe our services segment will make sequential improvements and all key areas impacted by Covid. This includes improving sales and operating performance in Q3 and for Q4 similar to the improvements we've generated the last 3 quarters importantly, our services segment community clinics and wellness centers that are.
Open and are delivering the strongest kpis and the company's history.
This gives us a ton of confidence and our model and how valuable it is to pet parents across the country.
We believe that our mission of delivering smarter options for pet parents to help enrich their pets' lives through convenient and affordable access to veterinarian products and services is more important than ever.
And we expect our differentiated position and the animal health industry will continue to fuel our long term growth.
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 and mid April to support our future growth.
Our outlook for the year remains suspended due to uncertainty from continued COVID-19 related impacts to our business as I've stated on calls previously this year, our internal budget for 2020, 1 reflects approximately $950 million and net sales and over $100 million and adjusted EBITDA with the only significant variable to this plan b and potential.
Ongoing headwinds from COVID-19 affecting the company and services segment.
To date, we estimate headwinds to our services segment of impact on our 2021 net sales by approximately $20 million and adjusted EBITDA by $7.7 million.
Similar to years prior Q2 represents our largest net sales and adjusted EBITDA quarter.
Keep in mind, we begin to lap. The addition of cap started this month or in August of this year.
We continue to maintain great visibility into our product segment and expect to generate another year of significant margin expansion demonstrating accelerating profit leverage of pet Iq.
Looking ahead, we believe pet IQ remains well positioned to capture a disproportionate amount of the pet 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, we expect to continue to benefit from rising pet adoption increase.
And dollar spend per pet and and emphasis on affordable convenient pet health care, all great industry tailwind for us.
Before I turn the call over to Susan on behalf of the entire team at Pet IQ I'd like to thank John Newland for his 7 years of service as CFO and wish him well and its future retirement, Jon has been and important member of our executive team, having successfully helped us transition our business from privately held to publicly traded company John's expertise and <unk>.
Contributions have been significant to our efforts to grow products and services business.
<unk> sales and expand margins.
And will remain and his role as CFO through March 31, 2020.2 to ensure a smooth transition and we have initiated and and executive search to identify a new CFO with that overview I'd like to now turn the call over to Susan.
Thank you Cort.
Our second quarter results demonstrate that the fundamentals and our services business are strong and we believe favorable opinion, just retail lens as well as our unique position and the market will help to fuel our future growth.
Today I will focus my commentary on our results versus Q1 of this year and the second quarter of 2019 prior to the pandemic since all of our veterinary wellness centers and novel clinics were closed in Q2 of last year.
During the quarter the states, we operate and more fully wrote that pulled back their COVID-19 related restrictions with the most relevant to our business being the state of California and Mccann.
While the health and safety of our employees retail partners pet parents and their pets remain our top priority, we scaled back almost all of our pandemic related protocols consistent with local and state requirements.
We are pleased with the continued improvement and our Kpis. The services segment generated sequential improvement and both revenue and adjusted gross profit and adjusted EBITDA.
Net revenues increased 16% and adjusted EBITDA increased 43% compared to the first quarter F 2020.1 this day.
And include the estimated contribution to revenue and adjusted EBITDA that cord mentioned had we not experienced COVID-19 related impacts.
When compared to the second quarter of 2019 net revenues increased 9%.
Adjusted gross profit was 29, 7%.
This is the third quarter, a significant improvement and up from 15, 9% and Q4 of 2020 and 'twenty 2.9% for Q1.
We expect to continue to improve and are on track to get back to our 39, 4% adjusted gross profit we delivered in Q2 of 2019.
Our growth and Q2 was partially offset by running fewer than expected community clinics. As a result of the labor shortages Cort mentioned and not yet taking any price increases to reflect the higher wages being experienced across the industry.
We expect to take a price increase for our services business beginning September 1st to help offset the wage related cost pressure.
Importantly, we've also benchmarked, our sequential growth versus the veterinary service industry and to better understand how we're doing.
Using that success data, we know that veterinary service revenue grew 13% from Q1 to Q2, we are pleased to have grown more than the industry for the same period.
Veterinary service volume or pets grew 8%.
For the second quarter, our pet increased 15% from Q1.
In addition, both our pets per clinic and dollars per clinic grew double digits.
We believe these are all great science that the services business is growing and meeting the needs and providing convenient and affordable services to our pet parents.
During the quarter, we continued to roll back on a pandemic procedures and protocols as a result, we started to see greater operating efficiencies as we reduced added COVID-19 related expenses.
Second quarter, adjusted EBITDA margin improved 220 basis points versus Q1 of this year, we expect to continue to drive margin improvement and the second half of 'twenty 'twenty 1.
Our team stepped up the number of new wellness center openings and the quarter with the addition of 47, new wellness centers and Q2. This brings us to a total of 16, new wellness centers for the year.
I wanted to take a moment to focus on our Greenfield wellness center openings and more detail.
You'll recall, we opened 46 Greenfield wellness centers and the fourth quarter of 2019.
This was during the winter season, and just prior to the pandemic.
We also collaborated on these locations with our retail partners, including the site selection and marketing execution.
But only a few months into the opening we had to close all of these greenfield locations along with the rest of our services operations due to COVID-19.
Now fast forward into the second quarter of 'twenty 'twenty 1.
Which represented the first time. These 46 locations were opened during a peak season.
We are pleased to report that the performance of these wellness centers accelerated exponentially and Q2.
And the highest pet count ever achieved and any greenfield location since their launch in 2018.
Much of this success can be attributed to partnering on the location selection and targeted marketing efforts executed by our pet IQ and retail partner marketing teams.
Keep in mind, our Greenfield centers start with no customer base and no consumer awareness.
Our marketing objective is to be where the pet parents are.
To accomplish this we've ramped up our efforts and both Geo targeted location services and paid search.
Location services and paid search campaigns work together to ensure that IQ locations are consistently presented and easily found.
To further drive pet count we've increased our investment throughout peak veterinary services season, and this has resulted in a 4 times increase and pet owning consumer intent actions like find at that location and get that directions.
He's intent actions result in pet parent acquisition, and we've proven that by evaluating and improving the correlation between paid search and an increase and pet count.
The Greenfield Wellness Center success has prompted us to open more with our Greenfield retail partners.
We're excited to announce 1 of our partners offered us a significant entry and expansion into Texas.
Which is 1 of the strongest veterinary service markets.
We will look to add locations and this day later this year.
Our conversion and locations also continued to perform well with all locations coming back in line or exceeding pre COVID-19 pet count levels.
However, the new conversion locations are running behind our plans for the year due to retail partners starting to build out a wellness center locations later than expected due to COVID-19.
For the second half of the year, we expect approximately 30 of our conversion and locations to shift into the first half of 2020.2 due to these build out delays associated with COVID-19.
Based on the new incremental opportunity, we have with greenfield locations and the shift and timing of retail location conversions. We now expect our buildout schedule for 2020, 1 to shift to 60% Greenfield wellness centers and 40% conversion.
This is the inverse of prior plans to open and 60% conversion and 40% Greenfield locations.
Importantly, the timing of the bill for a greenfield locations is within our control we continue to target our total wellness center build out for 2020, 1 to be and the range of 130 to 170 clinics.
And Q2, our team also continued to connect with pet parents virtually call volumes have doubled and the first half of the year compared to both 2019 and 2020 totals and.
In addition, our telehealth calls grew again in Q2 by 5% versus Q1 with most pet parents seeking advice about their pet health and wellness.
Importantly over 40% of the Telehealth calls we receive are not current pet Iq clients.
We've launched and nurture campaign to encourage these pet parents to become clients.
As I've mentioned the last 2 quarters. There are 2 initiatives, we continued to drive and monitor.
Our first initiative is focused on attracting new pet parents.
And Q2 over 50% of pet parents that utilize our services were new to pet IQ.
Carl we also experienced a similar rate of new pet parents, using our services and Q1.
Pet parents are coming to pet IQ for 2 reasons affordability and convenience.
Our second initiative is focused on our smart care wellness plans, which we launched nationwide and Q1.
Pet parents, using our smart care wellness times, PE and Memphis twenty-five dollar subscription fee and have access to unlimited visits and discounts on annual services routine care and products.
We remain pleased with the initial traction of this plan with over 6% of pet parents choosing to purchase a plant.
And 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 3 times our average ticket when pet parents are on this program.
We believe this is a compelling offer for pet parents and unique way for us to create a longer term relationship with them and their pet.
In closing I would like to highlight some relevant pet industry data from a report recently issued by the AVMA.
At the recent U S animal Health Innovation conference. The AVMA reported that U S. Veterinary visits for flat year over year in 'twenty, and 'twenty and that practice revenues increased 7.5% compared to 2019.
The report stated that this thing continues into 2020, 1 with veterinary visits declining 1% year over year and revenue increasing by 8%.
The AVMA reports and the majority of this growth and revenue came from existing clients, which are opting for more high value veterinary care.
Why is this important.
Because once again over 50% of our pet parents, and Q2 were new to pet IQ.
Full service veterinary clinics are incredibly busy managing complicated pet medical issues.
Pat I accused sole focus on wellness services helps relieve that pressure.
We believe this trend will continue through the balance of this year and into the future.
We also believe that pet IQ is uniquely positioned to meet the needs of pet parents, who are looking for convenient and affordable wellness services.
With that I'll pass the call over to Jon.
Thank you Susan I will now focus on our second quarter financial results in more detail.
The company generated record net sales of 271 million and increase of 1.5% on top of a strong Q2 last year and when compared to Q2 of 2019 during our pre Covid year net sales increased 22, 8%.
This increase was driven by.
Our services segment growth, partially offset by a reduction of product segment sales.
The site and lower product segment sales for the quarter was caused by a reduction of approximately $15 million from a shift and the timing of a seasonal play and take product sales to the first quarter from the second quarter of 2021, and lower prescription drug sales as we lapped high growth and Q2 last year associated with strong E Commerce.
Sales due to the closure of veterinarian clinics during COVID-19.
In addition, we estimate that the services segment would have contributed to the second quarter and an additional $12.6 million of revenue without any COVID-19 and related headwinds to the company's community clinics and delay and the wellness center build outs.
Looking at our results for the first 6 months and this year and net sales were $525.4 million and increase of 15, 8% compared to the same period last year. This removes some of the quarter to quarter shifts and the time and of our orders and demonstrates the underlying fundamental strength of our product segment.
2 year stack basis, our net sales for the first 6 months of 2021 increased 42, 3%.
Second quarter gross profit was the highest in the history of the company at $59.6 million and increase of 41.4%, resulting in record gross margin of 22% and increase of 620 basis points. We achieved these record margin. Despite an estimated 200 base.
At this point temporary headwind from COVID-19 related impacts and the services segment.
Adjusted gross profit was $63.6 million and adjusted gross margin was 24% for the second quarter of 2021, representing an improvement of 630 basis points when compared to the same period and the prior year.
General and administrative expenses for the second quarter of 2021 were $43.1 million compared to $38.4 million and their prior year quarter and increase of $4.7 million.
The increase was driven by higher amortization on our asset acquisitions that occurred in 2020, the largest being cat star as well as the increased stock based compensation expenses and.
And an increase and selling and marketing costs for both products and services segments.
Adjusted General and administrative expenses were $37.5 million compared to $24.6 million and the prior year period.
And increase of $12.9 million.
As a percentage of net sales adjusted SG&A was 13, 8% and an increase of 460 basis points compared to the prior year period.
Our higher mix of sales from manufactured products and their strong gross profit margin helped us achieve adjusted EBITDA of $34.4 million and increase of 21, 4% compared to Q2 last year.
For the second quarter, our consolidated adjusted EBITDA came in better than our planned adjusted EBITDA margin increased 210 basis points to 12, 7% compared to 10, 6% and the prior year period.
As we mentioned on our Q1 call there was a shift and the time and the seasonal flea and tick sales that carried earnings of 1.5 million as well as R&D expense of $2.5 million, while these shifts and timing benefited Q1 and reduced our Q2 adjusted EBITDA by approximately $4 million.
When looking at our adjusted EBITDA of 61.2 million for the first 6 months of 2021 compared to 42.8 million and the same period last year. It removes the noise and demonstrates a strong 43, 2% year over year increase.
On a 2 year stack basis, adjusted EBITDA increased 93% compared to the first 6 months of 2019.
Services segment, adjusted EBITDA increased 1.9 million from Q2 last year to 3 million.
We estimate that the services segment would have contributed an additional $5.1 million of adjusted EBITDA, if all existing and services locations did not have COVID-19 related and 19 impacts and our second quarter.
Turning to our balance sheet and liquidity as of June 30th 2021 the company had cash and cash equivalents of $27.2 million, our long term debt balance, which is largely comprised of its revolving credit facility term loan and convertible debt was $454.6 million as of June 30th.
2021.
The company entered into a new $425 million credit facilities, replacing existing facilities and April of 2020, 1 and the new credit facilities provide more favorable terms, including a 125 basis point decrease and the company's annual interest rate on its term loan and greater flexibility to support future.
Growth.
Representing total liquidity of $137.2 million as of June 30th 'twenty 'twenty 1.
Working capital increased to $218.1 million as of June 30, 2020.1.
Primarily as a result of working capital increases and a R and inventory given the seasonality and success of the business. We believe our available liquidity consistent contribution from the product segment and significant improvement and the services segment and positions the company to drive free cash flow and build cash in the quarters ahead.
As well as Opportunistically pay down our debt.
Finally, I would like to thank the board of directors and everyone at pet IQ from making the past 7 years so rewarding.
It's been a privilege to work alongside such a talented and dedicated team.
And I look forward to working closely with cord and the rest of the team during the transition.
With that overview cord, Susan Michael and I are available for your questions operator.
Thank you, ladies and gentlemen, we will now be conducting.
Second question and answer session and you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is and the quest.
And here you made.
And I'll start you if you'd like to learn as much from the Q4 margin.
I can't give you sneak on equipment it may be necessary to pick up the handset sales.
Our kids on almost all from questions.
Our first question comes from the line of Stephanie Wissink with Jefferies. Please proceed with your question.
Okay.
Hi, This is Blake on for Steph, Thanks for taking our questions on.
On the product sales I'm just want to make sure. So that that was in line with your expectations for the quarter I know you've got the Q1 pull forward and the.
E Comm comparisons so how did those compare versus your expectations for the quarter.
Yeah, I think Blake thanks for the question and this is cord.
We all are aware and are positioned retailers and us as a supplier to the market with trying to project what percentage of the 1 time business that came over from the E Commerce channel, what's going to be retained this year.
Both day and Eos estimated a higher percentage wise is going to stay and not returned to the vet channel. So it's a little bit below what we expected it to be.
However, it has virtually no margin and it is our lowest margin category by far across the company and its 1 of the reasons you saw as our manufactured items did better than we expected to make up the margin dollars and ultimately be.
In line with what we expected from an EBITDA perspective for the quarter. So our.
Sales were soft and for that reason and that's why we gave the comparison for the year to date numbers to get rid of the inter quarter.
Transfer of bit volume, but also gave you a stack against 2019 and from the same periods just to see how significantly 1 time business came over from the vet channel and that was closed during COVID-19.
Okay.
Got it that makes sense and then on the product margin that was a really strong in terms of manufacturing and split it.
It sounds like you think that 28 and sustainable for the second half so just to make sure. So that what all was driving that increase faster than you originally anticipated it sounds like.
On a large part of that was maybe the lack of E com.
Returning and anything else and there you'd call out.
Yeah, I think the mix, obviously being less.
Less product sales and distributions go naturally give you some of that mix transfer which accounted for on.
A small part of it not all of it the rest of it is is as we discussed in our script and are released we're still gaining share. We've been running that are manufactured business very and a very positive way, we've seen share gains and the share gains are coming through and our highest margin items and so that led to us having not increase we do believe we'll see it.
Similar trend moving forward, obviously, it's impossible to say the exact amount, but from what we're seeing right now we believe it's indicative of our future our mix and our future margin profile.
That makes sense last 1 and then so it sounds like you're taking a price increase and services. That's just from the services segment are are you planning anything for the product side at all.
Michael do you want to take that.
Just normal we're having some technical difficulties with the other speaker lines and getting them right back now.
Like Jeremy.
Yes, just about.
Yes, just a little we're gonna help everybody gets back on the line just on it.
Okay, and I guess, we lost some people just a second.
No problem.
Yeah.
I'll get started with the answers are being added but.
We've seen inflationary things across the business.
For the first half of the year more than we've ever seen it. It's on both the services segment and the product segment, which is also a very positive sign of how well we're doing with our manufactured items to absorb those costs and deliver the numbers. We delivered this quarter. We are preparing to take price increases to take care of those inflationary cost changes.
With the likelihood of those those cost increases being put in place at the first of 2020.2.
We think that you know based on the seasonality of our business and what's going on and the right decision and is for us to let our retail partners know that they are coming but have them be effective the first of the year, which will be something a lot on incremental margin.
Margin to the company, but we definitely included in these numbers. We've had the same increases you've been hearing from everybody else, where both the product side on the services side has seen cost and our cost of goods up pretty significantly.
Great. Thanks, a lot.
The speakers have rejoined.
I think we're ready for the next question.
Yeah.
Our next question comes from the line of.
Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good afternoon.
Good afternoon, and Brian My first my first question.
With regard to the product sales and I think it's a bit of a follow up on prior question, but no.
We're recognizing there's a lot of moving parts right now it's very fluid backdrop. It should we should we look at the Q. The Q2 number is temporarily depressed given some of these dynamics or is that is that more of a kind of a run rate type and have more of a normalized number.
Well, Brian I think Q2 by itself is an anomaly, we're comparing to a very odd quarter last year, where we saw explosive growth and the product business is the vet channel was closed and you know and this quarter. We're seeing the other anomaly that the retail partners that we worked with to have those sales ordered very heavily in Q1.
And they also have that slide for the flea and tick numbers and so obviously when the sales return to their normal growth rates.
Not gonna absorbed without much inventory and so the higher projected volume means we shipped more in Q1 than was needed for Q2, and they had to balance that out.
It will work itself out to where we saw Q3 and Q4 people returned to more normalized purchasing and we didn't have the significant increase that we had.
And those quarters from the from the second quarter. So you should see more normal normalized comparisons to the prior year on the product business, but Q2 definitely was an odd 1 for that purpose I've just explained.
Got it okay. That's helpful, but I guess and my second question, probably more for Susan just went through.
Regarding the service business, so you've mentioned and B the shift in composition more to Greenfield from from conversion. So I guess I wanted to stay on better.
And what's actually driving that and how should we think about any economic differences is that shippers are correct me and what the economics of a greenfield versus a conversion.
Yeah, Hi, Brian can you hear me Okay, yes.
And you really fun.
Okay. Good and we've I think we've had phone difficulties. So I just wanted to make sure and so a couple of different things and I'll start by talking about we started to see very compelling data coming out of first quarter and into the second quarter or so so 2 different pieces number 1.
And we've been sharing with our retail partners. Some data that we've compiled that first of all says that and 40% of pet IQ parents are new shoppers to the retailer so for them and it's a it's a great insight to help to drive traffic into their stores. The second piece is that they spend on average 1.6 more.
Her visit and again another great reason to bring us in and to collaborate with us on these clinics and.
Anyway, so the greenfield clinics interestingly as I explained on the call.
We started 2 and as we came into this season and this is really the first season and that these greenfield clinics have seen because we've been you know and it would be in and out of COVID-19, and and and and out of seasons and our pet counts just ramped they ramped up but they ramped I think free for 2 different reasons.
Number 1 because remember these are the clinics, where we started making selections and collaboration with our retail partners. So we put them through the metrics I went through the diligence that we drive on our side, we chose the the the locations along with those retail partners number 1 and then number 2 we've really dialed in our digital marketing and and we have.
And Geo targeted these locations and not only through paid search but also through location do you target and location services and be able to drive people to those centers. So I would say that the day that in short, which I realize I wasn't there for a minute and it is right. We're driving pet count, we're driving pet count and we're driving pet count there and very soon.
Similar rates to what we're seeing with conversions now I want to I want to caution you for a minute because it we're 6 months and but again the ramp that we're seeing and pet counts and are very.
Their conversions and I don't I don't see that stopping now.
Yeah, I think Brian it's important.
We believe the Greenfields and get to the same economic benefits. We previously have had a pay more guarded projection of they're not getting there for the first 18 months, where we think the conversions get there much faster.
But we're excited about them, we have our retail partners are leaning in and bringing us locations.
Remember the Greenfield locations, we control the construction and the entire process from India and so we're not dependent on our partner to deliver the location and so this year, we are going to do more greenfield locations to keep on track with our store opening plans for the year.
We'd still believe overall will and at 1000 stores when we get to a thousand stores will still be a 60.40 split just the conversion locations and they're gonna be a little heavier on the out years now that they've had a little slower start coming out of Covid. So that's the best way to explain and I think.
Yeah. So revenue would you say is that the dynamic right now is that the greenfield locations are ramping quicker than you initially thought which is clearly a positive and that's why you're stepping go on for a little further and to us.
Yeah, and without a control over the construction and to keep our teams that are ready to work working and we can get stores open and start that progression process. Because we do believe that's important to get the stores open and let them have that 18 months to get to that run rate. So.
And Brian I would add 1 more thing really be added the added pebble on the scale for us, whereas Texas I'm I'm bullish on Texas, Texas is and it is an incredibly fantastic state for veterinary services. So we're excited about the state of Texas.
Well, what about like Jon Congratulations with.
And look forward to work and a little bit longer but congratulations on your retirement.
Yeah, Thanks, Brian and you're not done with me yet, but thank you.
Thank you and thanks, everyone.
Our next question comes from the line of Elliot Wilbur with Raymond James. Please proceed with your question.
Thanks, Good afternoon, and core just with respect to your commentary around the drawdown of inventory and the E. Commerce channel do you have a sense that we've reached the full extent.
Event. This period, how easy is that for you to to gauge from.
Your position and then.
If there's any color commentary you can offer in terms of what categories may have been.
Impacted.
More than others, specifically thinking parasiticide or health and wellness if that drawdown was any more concentrated in 1 of those key categories.
And you haven't had the chance to me Michael Smith, but he runs our product division it was and the data very very deep I'll, let him answer your question and I think they'll give you a more thoughtful a response to your question.
Yeah, I think the short answer is we're in a much better position today than we were at $5.6 weeks ago and that is a byproduct of a couple of things 1 is clear.
Clearly, there's been some softness to the season and the year versus what we had expected, but as we got into the months of June and then, especially on the month of July and we saw a rebound and consumption, which helped draw some of that inventory off and addition to.
It's a more aggressive tactics that some of our retail partners have been deploying to make up as much of the dollars and the category that they can as there is still some season left to be captured and gain and if you looked at and assumption and the month of July and if you look at how they've come back behind and started to order or to replenish the strong consumption.
And the signals pretty clear that they are in need of inventory again, and no longer burning off and for those customers, who do share there on hand data with us and that's also a much clearer picture and getting to normalized inventory levels and and normal normalized weeks of supply and coverage for the category and.
And that specifically and flea and tick if you look at some of our other categories and health and wellness inventories been very healthy and and not a concern flea and tick E. Commerce, specifically, that's where the challenges have been and as we look at consumption and inventory levels through July and we feel we're in a much healthier position.
Okay, which and thanks for that response to Michael and you know sort of leads me to my next question. There's been a very strong launch in the vet market within the flea and tick category and Triple action product.
Do you think that had any impact in terms of drawing business back in and the vet channel versus.
OTC or ecommerce.
Yeah, I don't think it because the big draw from that standpoint, I think just in general stores were reopened and Eddie almost veterinarians that had on our available to see somebody had a pet waiting to be seen.
And so on and general consumer demand and a quarter of the vet channel reopened.
That products that extremely well.
But when you look at the vet channel overall, there on a unit basis fairly flat year over year on on unit consumption.
And theres been some share shifting between the bigger of animal health companies and that category because of how well that product on from a launch perspective, but we we have that item available to us we use it. It's also very expensive. So its a narrow customer base the buys it but I would not think that'd be a direct correlation to what.
We're talking about here this is on.
Literally our ex category over purchasing last year, because they were closed and now just normalize and bouncing back out.
Okay, and then as a follow up call.
I guess based on the.
The trends this quarter would that have any impact on your ability to realize your prior expectation in terms of the EBITDA contribution from cap store.
No I think what we have right now and our trends and we're very close to our numbers and the back half of the year. We expect the product division. Despite net dismiss themselves will be able to deliver its full margin contribution and EBITDA contribution for the full year, it's a cap starts performing well again.
Again, gaining share I think we said and our our statement that even though the flea and tick season, there's been a little bit off this year.
On our pet armor items was up 13% overall, and which is a strong compared to the other other brands. So.
We feel good about the full year contribution coming through and again. These these are ex sales are virtually no margin contribution to the company. So.
It's a it's a good thing to have but it doesn't affect our profitability.
Okay and.
And then last question just respect to the indications of labor shortages on the services side could you just talk a little bit about what you think is the primary driver behind that is it just reluctance to get back out into the work force or is it just you know excess demand for.
For ones services, I mean, what just trying to think about what the dynamics are going to be that sort of change that in the near term.
Yeah, I think the first thing I would say as you know we have been ramping our schedule is back up to pre COVID-19 levels clinics do you. If you remember our our community clinics, we judge based on each day is an event and we typically this time of year. We would have scheduled you know 17800 plus clinics.
For the fourth quarter.
When it came to cross over that kind of 15000 clinic, Mark and get back to those levels. We saw that there was a labor shortage and we were having a difficult time staffing those those clinics and we have a bunch.
A different things that we think are causing and some of it is just people that don't want to work in this environment, we have a.
Our labor pool, and our community clinics that is predominantly made up of 10.99 contract labor.
And I think in this environment they've chosen to be less engaged we are reaching out to all of them were aggressively recruiting against them and we're getting the feedback that they definitely want to get back to work Theyre just not comfortable just yet. So we're very comfortable then we're going to get back to the same levels as that.
At some point, but right now it's been more difficult and Susan anything else you'd like to add to that.
Yeah, you know I would Elliot and so if you if you remember our community clinic model, we have a veterinary pool of a couple thousand and veterinarians and we still have that pool today, so that pool has not gone away.
And the difference is COVID-19 and the environment, we sent a survey out to all day, all 2000, and there's there's veterinarians that are currently and our vet pool and.
And first of all resoundingly. They all said that they would recommend us to a friend. So we've got we've got a nice solid pool and veterinarians that are still there and that still want to come work with us and would recommend us to a friend and they have simply pulled back on the number of clinics and they operate because they're working and incredibly long stressful hours and they're full service practices.
So if you think about it just the news that you're hearing out there about net clinics and they're just it's.
And our veterinarians out there and not working 8 hour and days anymore, They're working 12 hour days and our days with really long complicated cases, with angry clients et cetera, and so at the end of the day, what they've chosen to do right now is to reduce their hours with us while they get through those days and so I think that we need to see some pressure.
Sure and he relieved on those full surface practices for people to start coming back and and and making some extra money with us.
Okay. Thank you.
Thank you. Our next question comes from the line of Joe Andersen with William Blair. Please proceed with your question.
Yeah.
Good afternoon everybody.
Yeah.
The first question.
And me and the budget for the year.
Right.
At 9.9 and 50 and sales and $100 million and EBITDA I think that.
Language and the past.
And correct me if I'm wrong may have suggested that.
There could be a.
Covid headwind of AR, and the range of $15 million to sales and $5 million to EBITDA for the year.
It sounds like that may have grown.
Given what you've talked about here today, how do we think about it.
The full year and the context of that budget.
<unk> impacted by Covid, and the first house and and and the ongoing impact on the second half at this point.
Yeah, Jon Thanks for the question I think if you remember we talked about you know the product business being and $800 million budget, and our services business delivering a little over $150 million and sales for the year and the services business delivering right at about $15 million of the EBITDA and net over $100 million on the plant.
You are accurate that and year to date against that $150 a million dollar budget, we are $20 million life on sales and were $7 million light.
On EBITDA contribution from from that organization.
Right now that number has gotten larger because again it was and the second month of second quarter that we saw the labor shortage kick in and we realized most of that increase and that time period, we have not seen that trend change, but it was also not going to be as bad as it was during the second quarter, because it's peak season, where we.
The most amount of revenue being done from.
From a seasonality standpoint, so we can't predict the future we are doing everything to make it better but we will continue to update you on through the year as we get the you know headed that direction, but definitely right now where we're running behind our internal budget due to COVID-19 related impacts on our service organization.
But what we are excited about.
Still up significantly versus last year significantly versus 2 years ago. I mean, we have more EBITDA and the first half of this year that we made of the entire 2019.
Yeah, No I understood and and I agree that's the right way to look at it I just wanted to make sure I understood stood at rate that.
We're coming off of the.
After the budget.
And based on that not coming off the budget. The budget is what it is we have the COVID-19 effect and the first half there's going to be some additional impact and the second half and.
And you know that is for us to kind of think through and reflected and our full year outlook.
And where.
We're looking at every single month to see what that impact is and try and guess it's impossible for us to tell you the exact number and the back half because it's such a dynamic environment, where the change and all the time, but we are seeing improvements I think the important thing that you're seeing is the last 3 quarters. We've told you we would see improvement. So we saw significant sales improvements you know move.
And up every quarter more importantly, the activities and we're taking and are generating more margin, where we're now up to 29, 7% gross margin.
Which is getting closer to our stated objective to get back to 39%, which we had and I and we are confident with the things that we're doing right now and seen in Q3 that you'll see improvement again and all the key variables.
That we measure that we're making progress to get back to our normal state. So.
Differently, we know you'll get back to the same levels. We know we're a business that is and this state running under normal circumstances over 950 million and sales and over $100 million of adjusted EBITDA and that will be the base once we get through Covid.
Okay.
Just 1.1 more as we think about that longer term run rate, which you just referred to.
Is there anything else that we we like consider a couple of things in mind and I'm, hoping you can comment on 1 is this migration.
And back to the vet channel and in certain areas of your business.
Does that go on for I mean, do you does that take a year for you to laugh.
In other words does that just have more more of an impact then on Q2, but.
Something that you have to kind of anniversary before.
Before you get back to a base level and then the second thing is just any update on your partnerships on the distribution side and whether there are any.
Puts and takes there relative to your kind of sales or profit outlook. Thanks.
Yeah. Thanks for question and so I think Jon you know, obviously, the anomalies and we talked about last year.
And that then led to creating some projections that led to anomalies. This year. It means we're going to have to anniversary both of those years anomalies before we're at steady state to say the first half of 'twenty 'twenty and the first half of 2021 we're not normal because of that.
Your second part of that is are we getting back to more of a stabilized run rate well, we're seeing the consumption going out the door and our partners and that consumption right. Now is returning back to what we would call a normalized growth rates pre COVID-19. So the E. Commerce channel is still doing extremely well its gaining share. It's just not you know 70% like it was when the.
Whole world shut down last year, and so we're back to more normalized rates for summer and the high Twenty's summer and the mid twenties, but.
Those are all numbers that have been historically, what's driven our growth and you've seen that over the years, 3 and up from 2017 and all of that growth rate to expand this is an anomaly why it's regress a little bit.
From a totally your profitability.
On a product business, we don't see any change and is delivering our overall profitability.
The margin profile of the business is and such good shape, we don't see that changing.
On our distribution agreements as we talked about last quarter with our largest partner we're in a very steady state for multi years, it's 87% of the business.
The other contract we did renew all of the customers accept a pilot we're doing with 1 of the customers no longer and the contract.
That will create a headwind on our product revenue and the back half that will not affect and.
And of our profit really from a margin perspective for the back half will be able to deliver full margin expectations on the product business again that carries such a low margin so and in the back half that that 1 customer and it's about a 30 million dollar change and our base by not delivering against that customer's volume.
30 million annual or 30 million and second half back half back half.
Okay. Thank you, but no impact on profit.
None and it's a again, it's a you know call. It a 4% EBITDA type margin and we are doing so well and how we're running our brands and that's not going to be visible.
Okay. Thanks, a lot.
Yep.
Thank you as a reminder, ladies and gentlemen, if you'd like to ask a question. Please press star 1 on your telephone keypad.
Our next question came from comes from the line of David Westenburg with Guggenheim Securities. Please proceed with your question.
Oh, Hey, Thanks for taking the question. This is Jon on for David and John Congratulations on your retirement. So first of all how should we think about labor inflation and the longer term impacts on the operating margin.
Well I think what you should be thinking about is that we're taking action to take to correct that issue and it'll be 1 of the things why we've held off as long as we could because we were hopeful that labor would return to normalized rates pre COVID-19, but it's obviously not the.
The pricing and activity that we're talking about will fully compensate the company company for those change and inflation rates. The service organization and we'll have those rates in place by the first of September and it'll be 1 of the factors that improves margins in Q3.
And obviously, you will see that as being something that'll be covered going forward. So it would be no change and the operating margins of the service organization.
<unk> Division Likewise, because we've seen it happen and our factories and other places and the business, where those and other costs that have come in we'll be taking pricing action as well, but as I stated most of those based on how our contracts work will not affect the back half of the year, but will be in place to effect next year. However.
And as I said, we with what we see even with those inflationary factors and place. We believe we are running against our budget for the product division and fall and we'll be able to do.
Just how strong were performing will absorb those inflationary costs and it'll be incremental margin and and an increase for next year for the company.
Got it. Thank you and could you also talk about your your excitement and telemedicine like us that are still a key initiative and what do you think that will start to talk about that as a growth driver.
Excuse me this year that telehealth.
Yeah, no. So we and we continue to lean in on Telehealth definitely and telemedicine is a is a little bit of a different story only because of all the regulations and I'm just kind.
And back in place and all of the states and.
Telehealth for us because we have such a large customer base helps us to push into telemedicine and I think a lot easier. So telehealth is at no charge, so people can and literally call our line and.
And and get a professional on the telephone and get professional advice on the telephone and we then transition that called into telemedicine, if it's necessary right now for the majority of the cases, we pushed them into the clinic physically since we're completely open now and.
So so very little is coming in through telemedicine and because of our our clinic reopening.
Got it thank you.
Thank you, ladies and gentlemen at this time, there and no further questions I would like to turn the floor back to management for closing comments.
We thank everybody for joining us today, it's been a extremely rewarding quarter, we talked about all the records that we sat with record sales and record margin and record EBITDA and all the all time highs for the company. Despite some of these anomalies we discussed we couldn't be more grateful for all of our employees our veterinarians are various people.
Across the company that have been working and such difficult working conditions and and difficult operating.
Operating environments to deliver this result, so we couldn't be more proud and and be more excited about the companys position, how we're progressing and the significant year over year improvements, we're making and both ourselves and our profitability of the company. So we look forward to interacting with all of you soon and look forward to reporting again and another quarter I hear on the very near future. Thank you for joining us today.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.