Q4 2021 PetIQ Inc Earnings Call
[music].
Greetings.
Welcome to the Pet IQ, Inc, fourth quarter and full year 2021 earnings conference call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
And please note that this conference is being recorded.
I would now like to turn the conference over to Katie Turner with Investor Relations. Thank you you may begin.
Good afternoon, and thank you for joining us on <unk> fourth quarter and full year 2021 earnings conference call and webcast on today's call are cord Christensen, Chairman and Chief Executive Officer.
V go off and Chief Financial Officer.
Susan Sholtis, President and Michael Smith Executive Vice President of the products Division 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, 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 a certain non.
GAAP financial measures, including adjusted gross profit adjusted SG&A adjusted net income and adjusted EBITDA, While the company believes these non-GAAP financial measures will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today.
As release for a reconciliation of non-GAAP financial measures to the most comparable measures preparing our brands with that <unk>.
But I keep us posted a supplemental presentation on its website for reference and with that I'd like to turn the call over to cord Christensen.
Thank you Katie and good afternoon, everyone. We appreciate you joining us today to discuss our fourth quarter financial results I'll begin with an overview of our strategic business and financial highlights Zvi will review, our financial results and outlook.
Finally, Susan Michael and I will be available to answer your questions.
We are very pleased with our strong finish to 2021, we reported fourth quarter record net sales of $196 6 million, an increase of 19, 7% compared to Q4 last year.
Fueled our record annual results with net sales of $932 5 million, an increase of 19, 5% compared to 2020.
2021 product segment net sales were $825 4 million, an increase of 13, 7% compared to the prior year and the services segment net revenues were $107 1 million, an increase of 97% compared to 2020.
We also generated solid margin improvement adjusted gross margin increased 270 basis points to the end to end the year at 22, 2% and our annual adjusted EBITDA margin increased 130 basis points to end the year at 10%.
Our financial and operational results demonstrate the strength of our diversified pet products and services offerings.
Our product segment posted record results, which were stronger than we expected as we benefited from a strong flea and tick and health and health and wellness sales.
And our services segment reported its best quarter since the onset of Covid in 2020 closing its fourth consecutive quarter of positive adjusted EBITDA, Although we still have a lot of room for improvement in the future quarters for services to get back to pre pandemic profitability.
At <unk>, we are a purpose built company addressing the large multibillion dollar animal health market through our retail and E Commerce partners.
Wherever pet parents choose to purchase their products pet IQ has its animal health product portfolio and clinics across sales channels, including mass grocery club pet specialty pharmacy or online.
It created a unique business model committed to convenient and affordable pet health and wellness care.
We continue to have the largest over the counter animal health brand portfolio with over 200 items and a dominant market share in pet prescription products sold through retail and online.
Products segment has been a consistent driver of our annual growth, particularly the last two years as we've operated through the pandemic.
As those of you familiar with correct you know we experienced variability in our services segment as a result of having to close and reopen our wellness centers and mobile clinics. Then followed by continued vet labor related headwinds today as we will highlight the robust growth trajectory of our product business. When he discusses our 2022 outlook and the <unk>.
Modest assumptions, we've made for the <unk> services segment as we work towards recovery in the segment's growth and profitability over the next several quarters.
Yes.
Focusing on our segment results in more detail in the product segment.
<unk> strong fourth quarter year over year sales growth of 17, 8% to $170 9 million, we generated double digit sales growth across six of our top eight product categories. During the quarter. In addition, both our distributed and manufactured segments also saw double digit growth and.
Benefited from a stronger than normal into the flea and tick season in the fourth quarter.
Our OTC flea and tick category in the quarter was better than we expected led by both the topical segment, which includes pet armor that increased 21% and our emerging brand within the oral segment cap star that increased 38%, our health and wellness portfolio also had an exceptional quarter as it contributed 63% growth.
Versus the prior year.
We also continued to experience strong growth in the E Commerce channel, which increased 23, 4% for the quarter and 22% for the full fiscal year.
This growth was led by our manufactured brands, which grew 47, 8% in 2021.
In terms of inflation, we have experienced cost inflation headwinds, particularly in labor freight raw materials and packaging as a result, we implemented a price increase November one across our manufactured products segment to offset most of these inflationary pressures.
From an R&D perspective, we're excited to have finalized and shipped our first orders of our Super premium health and wellness line for a large club store operator during the fourth quarter. The first few months of sell through have been strong and we expect a greater benefit from this item and full year 2022.
From a mixed standpoint, our business in the quarter consisted of 69% distributed and 31% manufactured sales.
As we look ahead, we believe correct use manufactured items can reached 32% of product segment sales for 2022.
We continue to participate in several of the largest and fastest growing categories within the pet industries, such as flea and tick solutions, along with health and wellness our team's emphasis on winning in both brick and mortar retail and E. Commerce continues to fuel our growth.
For 2021, the product portfolio gained 67 basis points of share within the flea and tick category. This share gain was led by both pet armor and cap star, which both gained greater than 125 basis points of share in the year.
As for health and wellness. We also continued our momentum in this high growth segment as we picked up 26 basis points of share for the year. This segment increased 12% across the market, while our portfolio increased 15% for the year, driven by vet IQ and increase of 31% and pet armor, an increase of 23%.
We have good visibility into our product innovation pipeline and are excited to launch two new products in the first half of 2022, and we expect to help fuel continued momentum in our branded product segment. We also are introducing a direct to consumer initiative in the second half of 2022 as we continue to provide smarter options for pet parents to help them.
Rich their pets' lives through convenience and affordable access to veterinarian products and services.
We believe our product teams strong operational execution positions us well for continued growth and increasing contribution from our own pet health and wellness brands at an attractive margin in 2022.
Now focusing on the services segment, we generated another quarter of net revenue growth and positive adjusted EBITDA. This was fueled by a solid quarter with double digit growth in Pittsburgh clinic and dollars per clinic, despite not operating a significant percentage of wellness and mobile clinics due to ongoing labor headwinds, while we expect the current labor such situations.
To continue near term, we believe our services segment will make sequential and year over year improvement as we progress through 2022.
During the fourth quarter, we continued to optimize the services segment to maximize the results and minimize the pet parents impacts.
First we continued to adjust our clinic schedules to reduce labor hours and cancellations.
We enhanced our retention and recruiting programs and finally, we increased wages of our staff and new hires to help with recruiting and retention.
This cost increase was offset by a price increase of approximately 6% that we took at the beginning of September .
As we discussed last quarter, we've taken the opportunity to optimize our new wellness centers opening plans and reduce the risk of deploying capital and starting to operating expenses prior to having the labor in place to operate the clinic.
As a result, beginning in the fourth quarter. Our team started to begin construction on new wellness centers. Once all required in center labor has been hired previously we would begin build out and construction then begin our recruiting and staffing.
In Q4, we opened 26, new wellness centers for a total of 98 wellness centers opened in 2021.
While we have full commitments to open with our retail partners across both conversions and Greenfield locations. We continue to believe this enhanced wellness center opening plan will also help ensure the best services experience for pet parents and their pets, our retail partners and our shareholders longer term, we still believe 1000 wellness centers are achievable, but we will be.
Prudent with our growth near term given the challenges in the labor market.
Confidence in our model and how valuable it is to pet parents across the country.
For example, $1 per clinic and pets per clinic continues to be the strongest kpis in the company's history.
We believe our differentiated position in the animal health industry will continue to fuel our long term growth along with the robust industry tailwind, including the increasing household penetration for pets, the humanization of pets, and increasing pet population and more pet parents looking for convenient and affordable pet health and wellness.
Going forward our team will continue to execute on our mission of delivering smarter options for pet parents to help enrich their pets' lives through convenience and affordable access to veterinarian products and services.
And finally I'd like to welcome to the Gladstone to Pet IQ Zvi joined US. The first week of January as CFO and has already made quite a positive impact on our entire team in our financial reporting processes with his energy for the business and fresh perspectives. He has 20 years of CFO experience supporting high growth companies.
To drive operational improvements and increased profitability.
Excited for our shareholders and members of the investment community to get to know the <unk> in the coming weeks and months. We believe he has joined <unk> at an ideal time as we continue to accelerate our net sales expand margins and increase our cash flow generation with that overview I'd like to turn the call over to Zvi.
Okay.
Thank you cord, it's great to be speaking with all of you today on my first earnings call as CFO Pet IQ last two months have been incredibly busy as you would expect and I've enjoyed getting to know the members of our talented team.
I'm often asked what attracted me to the company I was drawn to <unk> portfolio of brands manufacturing assets, and it's complete pet health and wellness platform that I believe are uniquely positioned in the industry and the company has a demonstrated track record of growing sales, while capturing an ever increasing share of the market opportunity.
I am excited about our growth ahead and look forward to spending more time with many of you from the investment community in the coming weeks and months as we execute on our growth objectives.
Now focusing on our consolidated fourth quarter financial results, we had a strong entered the year with solid growth from both the products and services segments, helping us to generate record net sales of $196 $6 million, an increase of 19, 7%.
Fourth quarter gross profit increased 29, 1% to $36 $9 million, resulting in a gross margin of 18, 8% an increase of 140 basis points from the fourth quarter of last year.
Adjusted gross profit was $40 2 million and adjusted gross margin was 21, 3% for the fourth quarter of <unk> 21, representing an improvement of 130 basis points year over year. This.
This margin expansion reflects favorable product mix driven by the growth in sales of the company's branded product portfolio with items, such as cap star as well as the wellness center optimization the cord mentioned.
SG&A expenses for the fourth quarter of 2021 were $41 5 million compared to $32 6 million in the prior year quarter.
Adjusted SG&A was $34 3 million for the fourth quarter of 2021, compared with $27 1 million in Q4 of last year.
As a percentage of net sales adjusted SG&A was 18, 1% an increase of 130 basis points compared to the prior year period, primarily due to an increase in expense to support the company's growth, including increased selling and advertising costs to support the service segment Wellness Center.
Clinic openings and support growth compared to Q1 brands and product segments.
Adjusted EBITDA was $15 $3 million, an increase of 17, 6% compared to $13 million in the prior year period.
Adjusted EBITDA margin of seven 8% was slightly lower decreasing by 10 basis points versus last year, which reflects timing of expenses as full year adjusted EBITDA margin of 10% increased 130 basis points versus the prior year.
Turning to our balance sheet and liquidity as of December 31, 2021, the company had cash and cash equivalents of $79 $4 million.
During the fourth quarter, we generated $13 million of operating cash flow, we expect 2022 to be the strongest cash generation year in the history of the company.
Our long term debt, which is comprised of our term loan and convertible debt facilities was $448 5 million as of December 31 2021.
In addition to our cash on hand of $79 $4 million. The company has $125 million of availability on its revolving credit facility, representing total liquidity, which we define as cash on hand, plus availability of $204 4 million as of December 31, 2021.
We continue to believe our available liquidity consistent growth and contribution from the product segment and improvement in the service segment positions the company to drive free cash flow and build cash in the quarters ahead, as well as opportunistically pay down our debt.
Now I'll turn to our outlook.
As we noted in today's press release, we are reintroducing annual and quarterly guidance.
For the full year 2022, we expect net sales of approximately $985 million, representing an increase of five 6% compared to 2021 or an increase of 10% excluding $36 million in sales related to loss of distribution rights for certain animal health Manny.
Factoring products, which we communicated in previous quarters.
We expect adjusted EBITDA of approximately $100 million.
Representing an increase of seven 6% compared to 2021 or an increase of 10%, excluding $1 8 million and adjusted EBITDA related to the lost animal health manufacturing products distribution that I just mentioned.
Our annual adjusted EBITDA outlook assumes adjusted SG&A to increase approximately 100 basis points to 17, 3% in 2022 compared to 16, 3% in 2021 as a result of an incremental $15 million or 150 or 150.
Basis points of expense to support our launch into direct to consumer to significant new manufactured branch launches and continued marketing investments to help accelerate growth of our manufacturing manufactured brand and product portfolio.
We expect two thirds of the incremental $15 million SG&A expense to be incurred in the first half of 2022.
Going forward, we anticipate SG&A to return to historical levels in years, when we do not have expense activity related to launches were significant product initiatives.
Our outlook also assumes a very little incremental adjusted EBITDA contribution from the service segments.
The services segment has not returned to pre.
Pandemic levels when the business contributed approximately $10 million to $15 million in additional adjusted EBITDA.
While we do expect to eventually return to pre pandemic levels based on what we're seeing in the veterinary labor markets. We believe it is prudent to assume the return will not occur in 2022.
We continue to believe the services business will be a key driver of long term EBITDA and sales growth. However, until the pandemic related dislocation and the labor market's normalizes, we plan on a slower ramp in clinics as we take a more disciplined approach and capital allocation.
Accordingly, we will not guide on annual Wellness center opening targets until the labor markets are more predictable and we will continue to execute on our wellness center optimization initiatives.
<unk> mentioned.
As demonstrated in 2021 and in our 2022 guidance and our modeling for 'twenty three due to the strength in our products business. We are confident the company will continue to achieve strong growth despite the labor headwinds and the services business.
For the first quarter of 2022, we expect net sales of approximately $270 million, representing an increase of 6% compared to the first quarter of 2021 for an increase of 15, 3% excluding $22 million in sales related to the loss distribution previously mentioned.
We expect Q1, adjusted EBITDA of approximately $28 million.
Representing an increase of four 1% compared to the first quarter of 2021 or an increase of eight 3%, excluding $1 million and adjusted EBITDA related to the loss distribution.
Q1, adjusted EBITDA also assumes adjusted SG&A as a percentage of sales to be relatively consistent with the first quarter of 2021 at 14, 7%, despite an incremental $3 million or 110 basis points of expense to support the launch of our two new brands.
We expect 2022 net sales seasonality to be very similar to the net sales cadence in 2021 for the first two quarters.
Recall in Q4, 'twenty, one we benefited from a strong late flea and tick season, and we believe most of our growth in the second half of 2022 will be in Q3 with Q4 net sales up nominally.
In closing, we believe we entered 2020 with favorable business momentum and good visibility into the growth of our business for the year.
With that overview cord, Susan Michael and I are available for your questions operator.
Thank you.
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One moment, please pull for questions.
Our first question comes from the line of Jon Andersen with William Blair.
You May proceed with your question.
Good afternoon, thanks for the questions.
And welcome Anthony.
Thank you.
My first question is on the products business you mentioned.
A handful of new products.
<unk>.
We'll launch.
And contribute in 2022.
I'm wondering if you could talk about a little bit more about the product health and wellness product that's already launched.
Perhaps how that's performing early on on the shelf and club.
And then.
If you can describe a little bit more maybe detail.
The additional items you plan to introduce.
From a timing perspective, and what maybe your expectations are from a from a contribution.
Standpoint on those as well just to kind of get so we can get a little bit better flavor.
For the innovation this year with which sounds like its particularly strong.
Yeah. Thanks, John I. Appreciate the question first of all comment about the health and wellness item that we spoke about on our last call that was shipped in the fourth quarter that we launched with a club retailer.
We shipped the product into all clubs in November of last year, we saw great sales out of the gate and we've now had three months of the item performing.
We said unit goal per club at this point, we're slightly ahead of that goal, which we thought was already in a great place and so we're very pleased with the performance. They are extremely pleased with it and obviously, we're excited because units shipped.
And in the fourth quarter, we get the full 12 months contribution from it.
We did do the item under the club's strong brand.
So the margin profile isn't dilutive, but it also is it accretive to the company's performance, but we expect that item to have a a long tail based on the initial read in there is the demand for Super premium health and wellness items and believe it's the highest quality soft too.
Health and wellness items, that's currently in the market.
This is a great value and I think the consumer sees it is responding extremely well to the item.
The two items, we're extremely excited about.
The first is similar to the item that we launched the club retailer we have a full line of Super premium health and wellness items, we've talked about throughout 2021 and delayed the launches we had other priorities.
And we were getting too late in last year. We're finally, there that items expected to launch in Q2 of this year.
And we have great plans and significant investment.
Against that brand as we see the upside for that to be.
A great opportunity for all years, where we have one of the best positioned vertically integrated health and wellness production facilities formulation teams and have <unk>.
<unk> not had the same participation of the Super premium area, where we've seen a significant amount of growth during the pandemic and so we're excited to be in a position to take our unique position as one of the only company that's vertically integrated with those skills.
Our skill sets and abilities to performance so that that will launch in Q2 predominantly with our online retail partners.
Initially and based on success, we'll see it could translate to brick and mortar in 2023.
The last item I'll reference as we are.
Are excited and are now shipping.
<unk> premium flea and tick item.
We've had a very successful execution of the cap star brand in the oral flea and tick space with significant growth incredibly high brand awareness and recognition and we've found a great opportunity with our innovation team through formulations that we've developed so have a great adjacent topical flea and tick the complement to <unk>.
<unk> brand.
That items have been presented.
Last fall to all of our retail partners and we couldnt be more excited about the amount of placement that we received from brick and mortar and online retailers in support of that brand. So the brand's name is called Nexstar.
It'll be advertised by the makers of cap star.
And we expect it to be a real opportunity for the company and out years. This first year as we always do with new brand launches.
We invest significantly more in the first year.
Our mature brands typically youll see 15% of net sales invested in advertising, where with these new brand launches, it's close to 50% of net sales in advertising so the EBIT contribution.
Not be there, but it will set the brands up for success as the sales are able to grow awareness builds and we're able to invest at similar levels, where those brands do have an accretive margin profiles to the companys current.
Margin of the business.
The last thing I would say and we mentioned in our guidance.
The company to support those two brand launches and a launch in the second half into the direct to consumer space.
Spending $15 million more than we've ever spent in our SG&A categories to support the advertising and awareness and ultimate <unk>.
Success of those brands.
Said differently, the core businesses growth and performance, we're reinvesting $10 million of earnings that would have dropped to the bottom line. If it wasn't for those launches or said differently. The company would have a slight lower topline tied to those those sales from those business those new brands, but the earnings would be $110 million versus $100 million.
But we are so confident in the growth trajectory of these businesses in the out years contribution. It is the right decision for us to invest in the business and to see the sales come through in the future on the earnings come through in the future.
That's really helpful. Thanks, Thanks for the detail and then on the sticking with the investment.
The incremental $15 million.
Yes.
Does that.
Should we think about that as kind of permanent structural spend.
Or to your point.
I think we referred to this in the prepared comments does that.
Normalized in an out year.
Trying to think about.
What to expect as we look to 2023 and also.
What are you going to be how do you monitor that spend closely and.
And are you able to step it up if it's really delivering at or.
Above plan rate or do you step it down if youre not seeing the return you expect on it.
Yes, I think first and foremost it's a great question and I. Appreciate the question I mean, the good news about where the average digitizing world's gone as every dollar we spend is equally anyone else's dollar out there for the spaces, we spend it and whether it's spent on shopper conversion that takes place with our retail partners like with Amazon or chewy or fits with <unk>.
Social and other direct to consumer advertising platforms to drive awareness, we can absolutely monitor through a number of key metrics and measurement tools to see that we're getting the return.
From those from those investments I think further to outline in my comment I made earlier about it across our portfolio.
Portfolio for our mature brands that are doing extremely well gaining share expanding as a mix without these new items, we're investing 15% of net revenues to grow those brands take share and do extremely well first year, we're investing 50%.
Based on the success of it and based on how that works will start to be in a position to pull back the percentage and we'll also see an increase in sales as awareness builds so youll see that spread in contribution coming through but as we do some of these things that we see a significant growth vehicles for the future. It's on us to continue to communicate well and let you know what level of investment we're making.
But we fully expect that all of these brands eventually get into the same place our existing portfolio with 15% investment of net sales, which when you have a 55% margin we should see EBITDA contributions coming from these brands in that mid 30% in those out years, So again year, one heavy investment year or two.
<unk> investment, but still not at par year, three we should see back into can we believe normal kind of slow and contribution.
Excellent last one for me.
Is on services and kind of as it ties into the guidance for 2022.
It seems that assuming.
Very little contribution EBITDA contribution from services.
It seems pretty conservative given I.
I guess, what kind of you said, you said about $1 per clinic and pets per clinic.
Hopefully.
The labor situation evolves positively during the next.
Nine months or so.
How did you think about that.
Net.
Again, because it does seem conservative was this just.
A decision that hey, we're better off.
Kind of following this as we move forward and if there is upside.
So be it.
So just tell us a little bit about your thinking there.
So little contribution to services this year. Thanks.
Yes, I think first we're very excited that versus 2020, the sales and service organization are almost 100% better in 2021.
However, we saw cancellation rates due to labor at the first of 2021 at a much lower level that ended up being at the highest levels in the history of the pandemic at the end of the year.
We were committed to giving guidance and managing our destiny as a company and as we committed to that guidance strategy and structure. We decided that we knew we are at a place that we understood how to operate in this environment with the unknown and guarantee we could've repeat the results in 2021 with no risk and we absolutely believe we have a team in place that can deliver something.
Other than that but we really can't predict with all the new versions coming out omni crown and others. If we're going to see other setbacks and so to be able to go out and tell you that we're going to deliver the sales and earnings numbers invest in our product business and still not projecting to recover that $10 million to $15 million of earnings that we made in 2019.
We do believe shows up at some point in the out quarters that is upside on the business and we're excited to go find that upside as we see that as we've started the new year January looks very similar to Q4, but we finally saw some sign in February and we are able to see that number finally dipped down in the teens for the first time. So if we were able to get down in the teens consistently we will see that.
And I think that's an opportunity for us to come out each quarter as we see that performance improve and communicate and increase in expectations as a service organization heels, but we'd rather start conservative and arrays those expectations throughout the year as we see what is happening and we have high hopes that we're going to be able to come in and bring back in some of those numbers throughout the year.
Great. Thanks, so much and good luck.
Thanks, John .
Our next question comes from the line of Bill Chapell with <unk> Securities. You May proceed with your question.
Thanks, Good afternoon.
Good afternoon Bill.
A couple questions I guess first on the.
Sales growth I assume that youre distributed products unlikely your own products are taking price increases for this year. So how much is factored into the kind of organic 10% growth and maybe even the services business and taking a price increase how much of that is factored in to your 10% outlook. Thanks.
So <unk>.
Surprisingly a lot of our distributed partners didn't take the price increases.
We expected them to take and so we haven't seen a lot of price contribution from our distributor business, which is obviously the biggest dollar percentage of the of the mix.
On our own brands, we did take some price, which translates into about 20% of the products division growth or about 2% of that 10%.
The rest is now projected as the organic growth is coming from the unit increases in the sales increase that take place in the business.
Okay and then the other question and maybe I missed the math I think you said, 31% of your sales came from manufactured products last year and youre expecting that to be in the mid <unk> or low <unk>. This year and I'm just trying to understand how that works with.
Losing the kind of the I guess the.
So let us business and then also what looks to be pretty promising new products, especially in the club channel. It seems like that number should be a lot higher or it could be a lot higher.
Yes, we saw acceleration build through the year from mid twenties 28, and then finished the year at 31 in the quarter.
Some of the lower number of the first year was obviously the reintroduction of the frontline program at Costco, which was about a 3% clip to our our mix. There. So we really recovered well through the year.
Not a projection that says we can be in the 32% to 34% range. We've been conservative to say 32, because we are always left to see just how much transfer comes from the vet channel from the prescription side, which can can skew that mix number we're confident in the dollar barge or the dollars, we're going to deliver the mix percentage will be tight.
How the other dollars show up and they are very likely will be upsides on both sides of it but from what our visibility is today, we feel great about that and feel great about being able to be in a position to have 10% growth. When you pro forma out does the wettest business.
On the full company for this next year.
Okay. Thanks, and then last one on the services I guess I'm just trying to understand the new model of with hiring before you build does that mean the time to breakeven for these new facilities is two.
A few months longer are you holding them kind of paying them well while the construction is being happening is happening is that the losses are a little bit greater upfront than the original model. Thanks.
Hey, Bill, let Susan no actually it does not it.
It doesn't it doesn't change a whole lot other than the fact that we're literally getting line of sight on veterinarian and staff ahead of time remember that when we when we build these class rebuild them very quickly so.
It usually takes us from the time, we start swinging hammers until were done about six weeks. So obviously when we bring people onboard when they go through a training program and so actually the timing works out works out pretty nicely to actually have the clinic up and running and bringing the new staff close to the same time.
Okay, and just to make sure I understand.
The labor shortage on beds or on on technicians or both.
It is primarily on veterinarians I think.
Well it is it's pretty much out there everywhere right now everybody is pushing the higher veterinarians and veterinarians right now I think that the.
Most recent that success data basically tells us that.
Regular practices they are working.
One five to two hours longer everyday and their actual productivity is down so theyre seeing fewer paths.
At the end of the day, it's because as.
Theyre stress, it's because of their work life balance we believe that we've got the absolute best model for veterinarians to come and work for US and I think we're also seeing that with our retention numbers and veterinarians comes to.
The work for us our turnover rate is less than 10% when the industry is experiencing a turnover rate of 25%. So I do think we're in the right place at the right time for these veterinarians and we haven't added all force.
Crew out of out there looking for veterinarians and recruiting and bringing them into our fold.
Great. Thanks for the color.
Thanks Bill.
Our next question comes from the line of Steph Wissink with Jefferies. You May proceed with your question.
Thank you good afternoon, everyone. We have two things we wanted to unpack. The first is just on the $15 million of incremental SG&A can you talk a little bit about where you're funding that from are there cost savings programs internally is it related to efficiency our mix offsets.
To get a little perspective on.
How you're funding that incremental definitely encouraging to see the support for the two new launches I want to understand a little bit about where it's coming from.
We're funding it from gross margin on the incremental sales from new products introduced and.
As we said our adjusted SG&A percentage is going to build about 100 basis points. So were it not for this investment our adjusted SDA would be down 50 basis points.
Yes, I think Stefan has said earlier in the call as well.
The base business with the growth in that business and the mix shift.
If we were not doing these programs, we think we can make a $110 million and so we're funding it out of our existing business plus the new items contribution.
To fund that to fund those investments.
Okay. That's helpful. And then you talked about the DTC business I think the last time, we spoke in.
Talked a little bit about it. This time can you just give us a bit more context for how youre thinking about DTC, if we roll forward a couple of years.
Could you be in the direct to consumer subscription business with respect to some of your product and is there a way to think about tying your services business through your products business through a platform like direct to consumer. Thank you.
So thanks for the question, obviously, we have a significant investment.
A.
Veterinarian management team and veterans across the country and we've thought a lot about how that asset helps us build a platform for consumers to interact to get what they need from an information from a device from a consultation perspective and also there is a lot of products from the over counter standpoint today that can be conducted through that space.
So we believe there is a opportunity to have a storefront, but it does interact with pet parents to help them in that self care space at a higher level and allow us to be able to be in that direct to consumer space a lot of people call direct consumer what they are doing through online and other places and we definitely view that as a huge priority with what we're doing.
With Amazon or chewy and already are slightly more mature than the typical DTC businesses out there in those areas, where does that and the last piece of where those people typically started to be able to have some of that subscription and some other additional stickiness with the consumer relationship.
With the DTC space and are excited the team has been assembled the work is getting done and we believe we will be able to show people the storefront and the second half of the year and start to conduct business, but we view it based on other DTC businesses. We've looked at all of this past year.
There is a significant size opportunity for the company and contribution in out years.
Very helpful. Thank you.
Thanks, Jeff.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if he would like to remove your question from the queue.
Our next question comes from the line of Elliot Wilbur with Raymond James You May proceed with your question.
Thanks, Good afternoon first question for.
You had mentioned that.
You expect cash generation of operating cash flow to be at record levels for the company for the year. So outside of maybe just the general overall increase in business level.
Maybe you can highlight some other initiatives working capital and such that maybe contributing incrementally to just the lift in the overall business.
Hey, Elliot your question Hugh.
You broke up there for a minute. So we missed the middle of which is the most important part. So if you wouldn't mind re asking the question for <unk> would be great.
Sure.
You had commented with respect to expectations of.
Record cash generation, our operating cash flow.
For the year and outside of just the general overall lift in the business Wonder what else may be contributing to that in terms of working capital initiatives or.
Other other endeavors that are increasing cashew.
Cash generation just beyond the.
The increase in sales.
And EBITDA.
But I would tell you number one that our capex is probably going to drop in halfway to let's call. It $5 million in 2021 for our headquarters buildup.
Or more.
Disciplined approach on the service Center Bill Bill that also will preserve some capex in terms of working capital initiatives I think we saw great.
Working capital performance in 2021 here, we are relatively flat, even though sales were up significantly.
The main drivers just executed on is EBITDA.
EBITDA performance plus the Capex initiatives as we've talked about our changes I talked about.
So I think we will generate significantly more cash from operations year over year.
Okay, and then for cord with respect to the.
DTC campaign any commentary you can make in terms of.
When do you expect to realize.
Positive.
Roy there or.
The payback period.
Yes, we're not ready to kind of announce all of the financial performance or projections. We've spent a lot of time studying other models that spent years kind of investing to appoint a breakeven to accelerate growth.
None of them were vertically integrated so there was margin going to contract manufacturing. So we have the largest portfolio of items that go into that type of a model, where we control. The production. So if we operate at par with those companies. We should have EBITDA margins that are very close to in line with where we are if not accretive so.
I think we'll have more to say soon but we're not quite there with today Elliot.
Okay, and then just one last question for.
Susan with respect to the services business and continue to see.
Upward trends and kpis or kpis at record levels, including.
Dollars per pet just wondering if you could provide some commentary in terms of what is.
If there is anything.
Any one item or category that specifically is.
<unk>.
Driving that given that you're continuing to see.
<unk> performance in terms of.
Pittsburgh Clinic, maybe just sort of compare and contrast, what you're seeing versus what youre seeing in some of the fix.
Fixed clinic sites, where you have less and less.
Less productivity with some of the key differentiators are thanks.
Yes. Thank you for the question.
It's across the board lastly in both of our both our wellness centers and our community clinics and.
When we take a look at the pets per clinic and dollars per clinic.
Our in significant double digit improvements.
Over over 2020, I think the important point to that though is that.
Just talking about a little bit earlier, just what's happening in the general veterinary market and we keep very close.
So the data that is generated by the AVMA aimed at success in what's happening with the industry.
Right now when you take a look at the fourth quarter industry wide and Thats arent seeing more patch and those pets pet parents are basically with where.
Getting into double digit growth as a pet parents that are adopting pets are that are bringing pets into their household. This path to go someplace and right now they're not going into year full service veterinary clinics. So a lot of it is attributed to the fact that those tests needs to be seen as thats need to be seen for their basic wellness.
And we are truly reaping.
The benefits of that we also have full service practices that are starting to refer to us and they're referring to it because again they cannot handle the capacity that is coming in their direction.
And we have the capacity to be able to handle that primarily because of our model because the fact that number one were affordable but number two we are convenient people.
So I need to make appointments to come and see us and so the volume that we can put to the clinic because of not taking appointments.
As far surpasses, what a normal veterinary clinic would say.
Thank you Arne.
Our next question comes from the line of John Lawrence with Benchmark you May proceed with your question.
Yes. Thanks.
Congratulations guys.
And welcome to <unk>.
Thank you.
Thanks, John .
Yes, just a quick question.
Just a question on the services business.
If you take the best of the best those top 10, 15% stores.
And applaud that model too.
On new territory, where this labor situation how much better is this optimized model running in that in that clinic.
Where where things are just overall better from a labor situation just to get a feel for the for the improvement on this optimization.
I think there is a.
Our mass answer the question a little differently and we will see if I answer it properly is not permitted to answer a different way but.
<unk> taken our best clinics that don't have any labor issues and looking at their performance.
They are hitting <unk> and hitting our revenue goals and exceeding those in are extremely good.
The other extreme is where we have labor pressures where were trying to force schedules to meet what the consumer would like us to do but when the labor doesn't show up we sometimes have partial labor shows up we have other operating expenses that are prepared to be there and we end up disappointing. The pet parents. So this optimization is really about getting the schedules to match the actual labor.
Environment and.
And when you match, the right labor environment, we optimize expense and revenue generation and we don't waste as much money.
That isn't the point that we're turning on to maximize the return on that locations potential because that comes when the recruiting is fixed and we have a full time labor and returned to full schedule. So in some cases, we may have a veterinarian has to work two to three days at a clinic and then go to day someplace else to try and cover the need of those markets but.
But if we had five days in both those locations were significantly better and more profitable than running differently.
Our community clinic that was running four days a month, we may only have enough labor to run at twice a month and we've given back half of the revenue for those days, but we're also not disappointing if you buy someone not showing up or potentially having the technician shop, then we have to pay them, but they can't go do the servicing because of that has to be present. So phase one is us really operating the business in.
The constraints of the labor environment to maximize results and reduce waste of expense.
We would love nothing more to be able to take our best performers and have that labor condition across the company because thats really when we get phase one of returning that $50 billion of earnings that we think will show up soon and then as we build in a more locations in our environment, we will see that expand.
We're doing a really good job of managing the business in a much better way because we've had time to study it see consistent patterns and then size the business to that labor.
And said differently. We ran 55000 clinics in 2021, we ran 72000 in 2019.
Today, optimize we're probably running 50000 community clinics, and we'll make more money running 50055.
Got it.
Got it thanks for that.
On the recent product launch in the club business.
Just from a timing standpoint.
When did you start marketing that product and putting that 15% of sales out there to the public to create awareness for that product.
Hey, John This is Michael.
As Cort mentioned that item shipped and launched in the month of November really not a lot of activation against.
The item at that time as they got introduced to the member holiday season focus on gifting and some other.
Areas of the business for them and then came out strong in the middle of January with our first promotion and activation and very pleased with the early results of the base business and especially pleased with the results. We saw in that first wave of activation, we have multiple programs throughout the year cadences.
In support with that retail partner to promote that item.
And again all indications right now is at or slightly ahead of track of the expectations. We had set and very happy with the trial generated by the by the activation of the promotion.
I think John the 15% I think youre talking about a $15 million of investment that youre seeing we call it very clearly in our release.
The cadence of that $15 million, where two thirds of it will be done in the first half of the year. The other third is really in the third quarter with nothing really happening in the fourth quarter at this point.
That cadence of spending that $15 million against.
All of those new programs and projects.
Just one other note on that 15 that core is referencing is to support our branded items that will be in the market in 2022, that's not necessarily in reference to the specific item that club items from last year.
Great.
Thanks, a lot appreciate it good luck.
Thanks, Sean.
At this time, we have reached the end of the question and answer session and I will now turn the call back over to cord Christensen for any closing remarks.
Thanks, everybody for joining us today, obviously, we're very excited about our record performance throughout 2021, despite the pressures from the pandemic and all the other essential labor pressures, we had our service organization. We're very proud of our full year results in a fourth quarter record results.
As a company, but we sit here today at the end of February 1st of March extremely excited about what we see happening for us in 2022, where the company is going for the full year and the projects that we have working on for those out years that we have in our pipeline and R&D programs. So feeling more excited at the company, how we're performing our animal health platform.
But as addressing convenient affordable access to pet health and wellness was one of the largest portfolios to address that is working and we see it working for a very long time. Thanks for joining US we look forward to talking to you very soon as we report Q1 results and our two distant future. Thank you everybody.
Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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