Q2 2022 PetIQ Inc Earnings Call
Good afternoon.
And welcome to the Pet IQ second quarter 2022 earnings conference call all.
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And I would now like to turn the conference over to Katie Turner. Please go ahead.
Good afternoon. Thank you for joining us on pet Ikea in second quarter 2022 earnings conference call and webcast on today's call are cord Christensen, Chairman and Chief Executive Officer, and Chief Financial Officer, Michael Smith, President and Chief Operating Officer will also be available for Q&A before we begin please remember.
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 CT on Form 10-K, and other reports filed from time to time with the Securities and Exchange Commission and the company's press release issued 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 will refer to certain non-GAAP financial measures, including adjusted gross profit adjusted SG&A and adjusted EBIDTA or 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.
Refer to today's release for a reconciliation of non-GAAP financial measures. The most comparable measures prepared in accordance with GAAP. In addition, <unk> 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 second quarter financial results I'll.
I will begin with an overview of our strategic business and financial highlights then we will review our financial results and outlook.
Finally, Z, Michael and I will be available to answer your questions.
First I'd like to begin by thanking all of our dedicated employees for their hard work and contributions in this dynamic and challenging operating environment. We.
We couldnt provide the access to affordable pet healthcare without you and pet parents everywhere are grateful too.
While net sales of $252 million were below our expectations of $260 million. We still grew consumption of our pet IQ manufactured brands launch new products, which we strategically invested behind and outperformed in the categories, which we compete to deliver continued gross margin expansion and adjusted EBITDA in line with our expectations of $28 million.
And year to date, our net sales were up 7% on an apples to apples basis.
Like most companies for pet IQ. The last few years are provided to be unlike any others in our company's history.
Our team has navigated COVID-19 and how pet parents shop for their pet health and wellness needs.
This year was less about Covid, we are seeing higher inflation impact consumers in a tighter veterinary labor market.
As we discussed last quarter unfavorable weather trends impacted the start of the flea and tick season in April .
While weather was still an issue and may consumption did improve however, this increase did not fully offset the decline to the start of the flea and tick season.
In addition to weather late in the quarter, we started to experience changes in consumer shopping habits, evidenced by trade down to smaller pack sizes, and lower cost brands as well as certain preventative care purchases occurring more closely to the time of need in this economic environment.
We also had $5 million of fill orders to support the start of the flea and tick season that shifted to the first quarter of 2022 from the second quarter of 2022.
We remain pleased with how our pet IQ manufactured products performed in light of the broader category weakness in Q2.
Our own manufactured brands represented 28, 9% of product segment net sales up from 28, 4% in Q2 last year.
And we expect that IQ manufactured brands to increase to over 30% of products segment net sales in the second half of 2022.
We generated sales growth across five of our top seven manufactured product categories during the quarter.
Few of the highlights from the quarter were that supplements grew 62% compared to two two last year.
Dental was up 23% versus the prior year period, and dog treats increased 80% year over year.
We continue to participate and be a leader in several of the largest growing categories within the pet industry, such as flea and tick solutions and health and wellness.
Our manufactured flea and tick brands are up six 5% year to date versus the first half of 2021, but less than the 24% that we expected year to date based on the weather and changes in consumer spending habits I mentioned earlier.
In terms of market share for the 12 weeks ended June 18 2022.
IQ portfolio gained 73 basis points of share within the over the counter flea and tick category and continues to command the number two market share position at 23% total share of the market.
This share gain was led by both at armour cap Star and Nexstar.
The health and wellness category. We also continued our momentum in this high growth segment as we picked up 98 basis points of share. This segment increased 8% across the market, while our portfolio grew 13% for the same 12 week timeframe.
Both flea and tick and health and wellness segment growth was fueled by disproportionate gains in the E Commerce and the club channels, which are not in Nielsen measured sales channels.
We continue to have the largest over the counter animal health brand portfolio with over 1000, Skus and a dominant market share in pet prescription products sold to retail and online.
Now focusing on the services segment or.
Our services segment reported its best quarter since the onset of Covid in 2020, posting its sixth consecutive quarter of positive adjusted EBITDA on net revenue of $33 million an increase of 17, 2%. This was better than we expected for.
For the first half of 2022 services segment net revenue was $60 9 million an increase of 16, 2%.
We believe our services segment will make sequential and year over year improvements as we progressed through 2022.
In Q2, we continued to optimize the services segment to maximize results and minimize disappointing our pet parents.
First we continued to adjust our clinic scheduled to reduce labor hours and cancellations when labor is unreliable.
We continue to focus on veterinarian retention and recruiting programs to support our future Wellness center openings.
Due to the challenging labor market, we opened six new wellness centers in <unk> and 10 wellness centers in the first half of 2022.
We remain prudent with our services growth near term given the challenges in the labor market.
We're also very excited to have added John Pearson to the pet IQ came in the second quarter as senior Vice President head of services Division reporting to Michael Smith.
He is responsible for managing all aspects of pet IQ services division, including strategy and operations to fuel growth in revenue and profitability.
John is an incredible operator.
And strategist with extensive retail experience, including a very strong track record in consumer retail working across multiple product categories and key leadership roles, having spent much of his career, helping to fuel growth at the world's largest retailer.
He is here to help us at an important time as we look to further enhance and optimize our services segment to reach more pet parents and their pets with our affordable and convenient access to pet health and wellness products and services.
And John's first 60 days he has already begun to lay out and implement plans with a fresh perspective, and constructive ideas to fuel future growth and as stability in our services segment.
Look forward to sharing more of his insights and our strategic growth plans with you in future quarters.
Finally, I'd like to address our updated annual outlook would zvi will cover in more detail.
Multiple consumer trends continue to support the long term growth of the pet industry and <unk> unique position in the market offering convenient and affordable veterinarian products and services.
When we provided our annual guidance at the beginning of 2022, we had visibility to consumption patterns across our brands and the categories in which we operate that we are growing.
We also had planned new wellness center openings.
At the time this information fully supported the total company growing net sales and approximately 10% on a like for like basis as compared to 2021.
Now with a much slower start to the flea and tick season due to weather the changing consumption patterns of pet parents in this economic environment I previously discussed and fewer wellness center openings than we planned due to the vet labor market. We are taking a more conservative approach to our outlook.
We now expect net sales of approximately 4% at the midpoint of our guidance.
This reduction our sales guidance can be broken down into three main areas.
First approximately one third of our reduced net sales expectations are due to lower than expected <unk> sales as a result of weather, which we don't expect to fully recover in the back half of the year.
Second approximately one third of our guide down is due to the changes in consumer spending that I outlined today and something we continue to closely monitor.
We have also seen the trade down in the flea and tick category that I mentioned earlier, which supports fed iqs manufactured brands, but it also means that in 2022, we expect the total category to be down and smaller than in prior years, even though we expect to capture a disproportionate amount of market share.
Third the final one third of our net sales guidance reduction is due to opening fewer wellness centers than we had expected based on the labor market. We opened 10, new wellness centers, a much lower number than we had budgeted for 2022.
The last area I'd like to cover in our guidance is our sales quarter to quarter and the first half to second half of the year.
If you take the second quarter and the first half of 2022 financial results and our updated 2022 outlook. It suggest all of our growth happened in the first half of the year.
Simply doing this does not tell the whole story.
In fact, our year over year growth was very balanced when you look at consumption by pet parents.
Q3 to date consumption has increased compared to the first half of 2022, and we expect this trend to continue for the balance of the year.
It is important for us to highlight that a number of our retail customers have been balancing their inventory and reducing the weeks of supply.
When you normalize these inventory events our growth is very balanced across the entire year.
In closing, we believe our differentiated position in the animal health industry will continue to fuel our long term growth along with robust industry tailwind, including increasing household penetration for pets, the humanization of pets, and increasing pet population and more pets looking for convenient and affordable pet health and wellness.
Our product and services teams continued to execute well on our mission and we believe that <unk> is well positioned to continue delivering increases in our net sales and profitability as well as generate solid cash flow over the next several years.
That overview I would like to now turn the call over to Zee.
Thank you cord, we are pleased with our year to date growth in our ability to manage our controllable aspects of our business to achieve solid gross margin expansion growth in net income and adjusted EBITDA in line with our expectations for the quarter.
We accomplished this even as our net sales were lower than we anticipated for Q2 as cord discussed while simultaneously executing on our planned marketing investments to support new product launches and the growth of our existing brands.
We remain pleased with our team's execution and the improvements in key areas of our business as well as the share gains achieved from new product launches.
We are continually evolving our business to provide pet parents with convenient and affordable pet health and wellness.
And when they want to shop.
Now I will go through key financials in more detail for the quarter and year to date period.
Since cord focused on our top line results for the quarter in detail I will start my financial review with gross profit.
Second quarter 2022, gross profit increased three 9% to $62 million, resulting in gross margin of 24, 6% an increase of 260 basis points from the second quarter last year.
Adjusted gross profit was $65 2 million and adjusted gross margin was 26, 4% for the second quarter of 2022, representing an improvement of 190 basis points year over year.
This margin expansion reflects favorable product mix, including the success of the Companys manufactured product portfolio such as the recently launched.
Nexstar.
We also benefited from service segment optimization.
SG&A expenses for the second quarter of 2022 were $56 million.
We had a $43 1 million in the second quarter of the prior year.
Adjusted SG&A was $44 1 million for the second quarter of 2022 compared to $37 5 million in Q2 of last year.
As a percentage of sales adjusted SG&A was 21% an increase of 420 basis points compared to the prior year period, primarily reflecting $5 8 million of planned incremental marketing to support the launch of our two new brands and continued marketing investments to help accelerate.
Growth of our manufactured brand product portfolio.
Our Q2 net income was $4 7 million.
An increase of 16%, resulting in EPS of <unk> 16.
Adjusted EBITDA was $27 6 million in line with our Q2 guidance for adjusted EBITDA of $28 million.
We are very pleased to have still achieved our target for adjusted EBITDA for the quarter. Despite the lower than expected net sales for Q2.
We continue to believe this demonstrates the strength of our pet IQ manufactured brands and our team is focused on managing our costs.
This resulted in second quarter 2022, adjusted EBITDA margin of 10, 9%.
<unk> ahead of our expectations for the quarter.
Turning to our balance sheet and liquidity as of June 32022, the company had cash and cash equivalents of $5 4 million.
During the second quarter, we generated approximately $15 8 million.
Operating cash flow, excluding working capital and vessels.
We continue to expect 2022 to be the strongest cash generation year in the history of the company.
Our working capital as of June 32022, or $224 5 million, an increase of $6 4 million from the same period last year.
Our working capital needs are primarily to fund inventory and accounts receivable both of which can fluctuate based on the seasonality of our business retailer demand and the timing of new product launches.
The increase in working capital is primarily due to higher than normal levels of inventory driven by lower sell through unexpected as well as our decision to maintain adequate weeks of supply given the challenge supply chain environment.
We remain comfortable with our levels of inventory.
Our long term debt, which is comprised of our term loan ABL and convertible convertible debt facilities was $467 4 million.
As of June 32022.
In addition to our cash on hand, the company has $120 million of availability on its revolving credit facility, representing total liquidity, which we define as cash on hand, plus availability of $125 4 million as of June 32022.
Keep in mind due to the flexible nature of our debt facilities. The company can expand availability by an additional $150 million if needed.
We continue to believe our available liquidity consistent growth 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 turning to our guidance.
<unk> already covered the reasons for our net sales changed I will focus on specific guidance ranges for both the year and Q3.
For 2022, we expect net sales of $920 million to $940 million in line with 2021 based on the midpoint of the guidance.
For comparative purposes, we expect net sales to increase approximately 4% compared to 2021 based on the midpoint of the guidance, excluding $36 1 million of sales in the prior period related to the loss distribution.
We expect adjusted EBITDA of $92 million to $94 million in line with 2021 based on the midpoint of the guidance for.
For comparative purposes, we expect adjusted EBITDA increased approximately 3% compared to 2021 based on the midpoint of the guidance, excluding $1 8 million of adjusted EBITDA in the prior year period related to the loss distribution.
We continue to assume adjusted SG&A will increase approximately 100 basis points to 17, 3% in 2022, compared with 16, 3% in 2021.
As our team focuses on managing our controllable expenses and achieving broader.
Greater cost efficiencies.
Keep in mind that our annual outlook also assumes very little incremental adjusted EBITDA contribution from the services segment.
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 are seeing in the veterinary and labor markets. We believe it is prudent to assume a return will not occur in 2022.
Now for our third quarter of 2022 guidance we.
We expect net sales of $200 million to $210 million, a decrease of 1% compared with the third quarter of 2021 based on the midpoint of the guidance for.
For comparative purposes, we expect net sales to be in line with the third quarter 2021 based on the midpoint of the guidance when excluding $3 5 million of sales in the prior year period related to the loss distribution.
We expect adjusted EBITDA of 16, five to $17 5 million, an increase of three 8% compared to the third quarter of 2021 based on the midpoint of the guidance.
For comparative purposes, we expect adjusted EBITDA to it.
Increased approximately 5% compared to the third quarter of 2021 based on the midpoint of the guidance, excluding <unk> 2 million of adjusted EBITDA in the prior year period related to the loss distribution.
In closing we are pleased with execution for the first half of the year in a challenging operating environment.
Our team remains optimistic about our growth for the balance of 2022 and over the next several years.
We believe we have a strong team in place to provide results for all of our stakeholders, while continuing to deliver on our mission of smarter convenient and affordable option for pet parents.
With that overview cord, Michael and I are available for your questions operator.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And our first question will come from Jon Andersen with William Blair. Please go ahead.
Good afternoon everybody.
I guess I wanted to start with the some of the commentary that you had on.
The consumer.
And.
Also the late spring for the seats so could.
Could you talk a little bit more about what you've seen subsequent to the late start which I think to your point was weather related.
What level of consumer engagement, you've seen subsequent to that and when you think about these changes that you're seeing whether it be trade down or migration to lower pack sizes.
Is that is that.
Good for your profitability, because I would guess it would often made trade trading into some of your manufactured brands, which are higher margin for you.
Yes. Thanks, John for the question. This is cord and I'll answer most of that Michael Smith may add some points as well.
Obviously, the month of April and part of May we had snow and cold weather across the country, which was unusual for the start of the flea and tick season.
Flea and tick category in that time period ran negative.
So last year across all data sources that included Nielsen online club.
And the negative 20% to last year, we saw it go into the teens in May.
And then we started to see consumption start to pick up.
Has it started to warm up.
And then as we got later in the quarter, we did start to see the <unk>.
<unk> down effect you talked about.
And we start to see some consumers at the very low end of the.
Retail shopping.
Patterns or retail as you would expect to have.
This holds with lower household income.
Units being less than normal and as we were not investigated bound up there is consumers that are choosing to purchase when they have an issue or closer to deal with an issue versus having the money to deal with preventative care.
From a household penetration standpoint, it represents about a half a point on.
Household penetration so it's not a huge number that left the category, but if you look at the health of the overall category taken account trade down from some of the high end all of these issues weather.
Year to date total categories running a negative in the high single digits, which is unusual for this category when you take all data sources.
Including online club and Nielsen and you name it.
We're fortunate as we said in the.
Release that in mice mice.
The commentary that our brands are running six 5% ahead year to date.
So we're.
Definitely doing better than what the market is done but based on a healthy season, our placement the way our brands have been performing new item launches, we would expect it to be 24% ahead. This year and so that's why you see a more conservative approach and right now based on that consumer consumption piece that we're seeing right now we're anticipating.
Baiting that if it continues as we've modeled it and as we've seen it we would finish the year positive 4%.
And so it's still a very good year for us in a very tough year, and we're taking tons of share in the category, but it's definitely not in line with what our expectations were when we started the year and.
Built our modeling and built our budgets for the full year. So.
Michael anything else you'd like to add.
Yes, John I would just add a little bit and largely echo <unk> comments I think one of the things that we flashed back to March April was we were trying to ascertain how much of the impact we were seeing in the category was truly associated with seasonal events like weather and how much was more macro environment pressure on the.
<unk> as we moved into the later months of Q2, what was clear was that.
It is becoming less about weather and more about some of the macro challenges that the consumers being being faced with so at this point as we think about Q2 results and what we're signaling for the back half is an expectation that those macro challenges continue throughout the rest of 2022 and that we can.
<unk> to over deliver from a share perspective, and outperform the category on a relative basis.
Okay. That's that's.
Helpful.
I guess looking <unk>.
Sticking with products for a minute, but looking a little bit further ahead.
You've launched some innovative new products this year.
Sure.
Is that.
Zoom, you kind of expect to.
Yeah.
Build upon in 2023, so anything you can talk about.
Based on your line reviews.
To the extent that you had them so far.
The innovation that you brought to market this year and how you think that that might carry forward into 2023, and then I think you also have at least one major new new launch that Youre planning in 2023 could you correct me on that if I'm wrong and tell us a little bit more about that again I'm kind of I know im looking forward, but.
It's clear that this year is going to be what it is.
Want to understand what we can look forward to on a distribution and innovation front as we as we look out a little bit further.
Yes, I think.
I'll answer the second part of your question first and let Michael take the first part as we said in prior quarters, we've been investing heavily in some new items with our R&D team one of the more extensive investments we've made in a long time.
Very excited for that item and what it could contribute to 2023, we are not ready to.
Communicate on what's going on with that right now just because.
We have lots of things, we're working through with the EPA and other things, but it will eventually come to market. We believe it is an exciting item for 2023 and should have.
One of the most meaningful impacts on our step increase in our manufactured brands.
Performance once we're able to launch that so it's going to be great. So Mike.
Michael If you don't mind, taking the first part of that question.
Yes, John relative to Nexstar as performance, what I would say is that we set share goals for that item in terms of the impact it would have or the portion of the market that it would command and we're actually trending ahead of that objective.
The challenge is obviously the size of the pie. This year is a little different than we expected in the flea and tick category, but from a share perspective.
And where it's sourcing volume we feel very good about what that means as we begin having conversations with retail partners about 2023, if you recall when we.
<unk> came in and started discussing that launch we acknowledge that.
The Green light from the EPA came a little bit later than ideal which meant some of our customers who are further down the road in our 2022 planning cycles.
To be able to incorporate that into their strategy.
<unk> customers, who did not build it into their 22 strategy I would say, we feel very good about it being a focus and an initiative that will very likely be part of their 2023 strategies.
Okay, that's great to hear.
The last one from me well two quick ones on services.
Yes.
What what's it going to take.
Two two.
To be able to kind of higher or retain more events.
Is there any light at the end of the tunnel. So that you can kind of re et cetera, Reaccelerate. The center build out and then the last one I'll just hit you with both right. Now is just on cash flow has there been any change to the free cash flow outlook for the year, I think you've talked about $50 million in or even around that in the past.
Any update there would be helpful. Thanks.
Yeah, I'll take the first part and I'll, let <unk> answer the cash flow part.
When we finished so.
John we no one's working harder than us to recruit retain and hire veterinarians and I think as you go out and hear what the entire industry is talking about this is an issue we're all living with right now.
It's going to be.
Long term battle, we feel as we are out meeting with the schools and every other place to figure out how to deal with the.
The issue, we recognize for us to get back on track for what we want to build an open we have to recruit existing that's from their existing.
We're currently working in.
The numbers we've opened.
Opening 10, so far.
Was not the goal for the year by by any stretch of the word but we also are our hiring and getting better labor thats solving for unreliable labor or other centers that were running partial scheduled because we're using temp labor.
So we have chosen to use almost another 25 veterinarians that were hired to really stabilize the base as well. So I think in this environment we're being.
Prudent with our decisions on how we're using labor that's there we're working hard to solve for it.
But we are unfortunately in a market that this is or is that right now just throwing money at it or people out it doesn't seem to be what solve it. So we'll just have to keep you updated as we work through it and as we see the light it will definitely be the first ones to share that with the market.
Thanks for the questions, we do want to ask the capital question.
Can I just quickly follow up on the cord.
Go ahead, John while I have you.
How are your retailers do they understand this or is there any any pressure from them to try and solve the sooner rather than later are they losing is there any I don't want to say lots of interest but.
I assume some of your customers and hope to have more centers up and running by this point in time. So is there any risk to this creates to your longer term goal of getting to 1000 centers or mark. Thanks.
No just the opposite John we've never had better engagement and partnerships with our retailers, they're doing more now to make sure. The ones. We already have are successful and they're giving us more locations to recruit against what we can make it easier to get more of that and so I would tell you our top and best customers are I've never been more engaged they've never been doing more with us.
In that area and their patient because they have similar issues with some of the technical labor in their own businesses. So there I guess.
Standing right now and they also know that we are bringing them solutions as fast as we can bring them. So.
We don't have any pushback or pressure from our customers. Obviously, they would love more and we would love to give them more but right now we're all working in partnership to deal with it.
Makes sense.
I think John Pearson is doing some really amazing things to stabilize our base in a number of ways.
I think like I mentioned in my stated remarks, very excited to share. The successes, we're going to have short term and long term as we started to let his plans.
Kind of take hold so.
It'll be there'll.
It'll be something that will continue to be a bright spot as we make improvements. So just isn't going to happen as fast as we wanted to but definitely going up into the right and being a positive contributor so.
Because we would like to comment on cash flow. Please.
On the cash flow John if you remember last year, we ran a negative 11 million of cash flow. We had guided earlier this year would be $40 million to $50 million.
Given the lower EBIT.
Given the higher interest rates, we now think will be more like 30 $30 million to $40 million, which will be our highest.
Cash flow year ever and I think youre going to continue to see that cash flow improve next year as well.
Thanks, so much.
Our next question will come from <unk> <unk> with Oppenheimer.
<unk>. Please go ahead.
Good afternoon, and thanks for taking my question. So first one on the guidance reduction is there a way to quantify what the impact was from retailers pulling back on orders on your reduced guide for the year.
Yes, I think well thanks for the question, but that's good to hear your voice.
Again, it's difficult to quantify across every retailer, but in general based on inventory levels and the time it took them to sell off in Q2, there was about three weeks of excess supply we believe across all the markets.
<unk> in Q3, that's burning off.
And if you basically add back that that burn off in Q3 Q3 would have been <unk>.
Positive and so as you look at the underlying consumption through the various data sources youre going to see that the consumption is very good in Q3 in these categories and it really the only negative parts of our sales is this inventory burn out, but it's about an extra three weeks of supply that's being.
Taken down so much where people are over extended in some of our some retailers are being more conservative in this economic environment, where if they were running a weeks of supply last year, maybe theyre running six weeks this year. So.
That's the best way I can answer for you.
Okay. That's helpful. And then just on if we can take category can you just talk about the competitive dynamics that you're seeing right now I know what I'm doing some historic Dax you see a lot of promotions within the casual category I can't tell if that's normal if that's something you need to the current current environment.
Michael you want to take that one please.
Yes. This is Michael.
I would say.
The aggregate, we're not seeing disproportionate levels of activity or volume sold on deal beyond historical norms.
We are seeing actually a bit of a pullback in what I would call demand generation.
Marketing activities driving awareness and more investment in.
Pricing actions.
The pricing actions that I have seen across the category.
Largely been at the premium tier as you look at where the challenges are at in the category. The premium tier has felt a greater.
Greater impact of some of the consumer behavior change and they are attempting to address that.
I'd say the results that we've seen so far from pulling those levers from some of those brands likely youre not delivering the results that those brands or retailers desired, but that has been a play that has been ran a bit more often in the last three months, but total promotional investment or spend I would say.
As largely flat to down just a change in the tactics and we see a pullback in what we would call demand generation and an increase in.
Pricing actions that do not look to be delivering expected results.
Okay, great. Thank you for all the color I'll pass it along.
Our next question will come from Bill Chappell with true Securities. Please go ahead.
Thanks, Good afternoon.
Just starting off.
Following up on.
On the <unk> question I guess.
I understand.
I think I understand the <unk>.
Problem, but I'm just not really sure why there's a change in just the past three months, maybe it would seem like you have a pretty good visibility to the number of beds out there the number of beds that are coming out of school.
And also have a kind of a I would assume it takes three four month lead time just to start one of these centers up so.
I, just don't understand whats changed or what you didn't know three or six months ago.
In the vet market why it's gotten that much tougher because it's not like a does the general labor market. These are very specific personnel that you're trying to hire in.
You should at least by their licenses nowhere. The bodies are so help me understand that.
Yeah. Good question Bill and believe me we've studied all the time as well look at it closely.
I think what.
And it's been interesting as we've seen even more on reliability.
Instability across <unk>.
Existing market as well as whether it's our competition being super aggressive coming after our labor like we're coming after there is but if we made <unk> 20 hires in the quarter were stabilizing our existing store base, sometimes more than we anticipated we would need two versus opening new stores and so on.
Opening six is what we used for new stores. The real story is there was another nine or 10 or 12 yuzu stabilized stores that were that were <unk>.
Having unreliable labor or people that were being recruited away with unreasonable terms to work places that we're not going to.
Pay those kind of rates for that type of work so.
It's really dynamic right now everyone's struggling fighting over the same pool and if you got out of these conferences like we do it's funny, we all talk about it and you hear it every time, we're all stealing each other's recruiters milestone each other's veterinarians and we're moving to moving at all around but.
No one has been able to stabilize it because the pet parent demand is there and so people want to open stores to meet the demand and where we.
We don't have it pinned down yet bill is the best way I could tell you we're doing the best we can right now.
Okay, and then back to the product kind of commentary about how the year is playing out I guess I don't.
Fully understand.
I mean talking about weather and then also about inventory destocking at retail it seems like that's the same issue. It seems is it not that you had shipped in a certain amount to retailers. It was a poor season because of weather and so now they're just destocking or they have too much supply or is there an incremental.
Decided for some reason at the end of the season, they won't even less inventory going into next year.
I think.
First and foremost the.
Less purchases of flea and tick caused by weather and consumers buying less because of the economic environment.
<unk> into the inventory issue the inventory issue is less about a sales issue and it's more about timing of when the sales occur.
And so as we look at the issue we really study that the whether that is created less purchasing on top of that some consumers not participate in the category of trading down into smaller pack sizes buying cheaper brands, taking dollars out of the category.
The inventory is exactly as you described it as a component of change in the timing based on what causes the less consumption or causes that to happen and it is destocking in some cases. It is what you described retailers being more conservative on weeks of supply at end of season because.
And they're trying to balance other inventory issues they have across their box, so whether it's seasonal stuff that didn't sell or otherwise.
So we don't really look at the inventory has been.
A reason for the dollars in total unless it's a destock to last weeks in prior year, but it's really because of the weather.
Weather and the consumer spending that's really other than the inventory just follows that.
That per the retailers by guidelines.
Okay.
Any sign of any less enthusiasm for the overall category even though.
It would be you have higher price products and kind of the low end flea and tick and maybe consumers going into 'twenty three arent as interested if they're trading down, but that's not that's not what you're saying.
No not at all and honestly the trade down is people buying the very very high end $70 $80 $50 boxes still wanting the formulas that are similar which is where our brands play a 25% in 'twenty.
And even the private label that we produce for Amazon another.
Major retailers like chewy, and others, where we're the we're doing their private label, we're perfectly positioned for people that are still looking for veterinary and quality product at a better price.
So we think we are positioned well in that trade down where we're not seeing the trade down people going from the very very high end down to a $5 box of Hearts, that's not what we're seeing it.
50 go into the 25 or a six pack going to a three pack.
Got it thanks, so much.
Thanks Bill.
Our next question will come from Elliot Wilbur with Raymond James. Please go ahead.
Thanks. Good afternoon first question on the services business, if my math is correct cord theirs.
Bit of a bump up in terms of the number of stores, our new stores that are in the same store base over the next couple of quarters and I'm wondering if you could just talk about those how the new stores or newer stores are trending in terms of revenue trajectory.
But to what you would normally anticipate in the first 18 months and the overall profitability of new stores versus the the.
Historical experience and then maybe if you could just give a little bit color in terms of some of the key metrics in the quarter the.
T Kpis in terms of.
Pets treated an average ticket price.
I wanted to ask a question on the parasiticide market.
Outside of the commentary around sort of a.
Consumer trade down effect.
The weather.
One of the larger players in this space.
Last week basically suggested that they've seen significant share gains in the oral category.
And there are X product by being able to pull demand away from the OTC channel in terms of older topical.
Collars and some of the oral <unk>.
Moving to newer generation.
Parasiticide I'm, just wondering if you've seen that impact as well may be compounding some of the other trends that you've discussed.
Yeah, Okay, well I'll take the second.
Second question first.
We haven't seen a huge significant impacts from the trio pulling share back out of retail typically the.
If you look at the last.
567 years in the retail segment, there's a very specific consumer that's not going to the veterinarian looking for their parasiticide then when you look at the pricing differential with the vet visits plus the cost of trio.
We have not seen that and if you look at the share data going on there's been a lot more share transfer happening between what I'll call the mono oral versus the trio.
And you've seen a lot more share transfer there that some happened in OTC. So I think the vets have done a nice job of getting the customers to migrate to the trio, giving that upsell in the ticket there and transferring share from Merck or b I or others that don't have that package, we have not seen the OTC space.
Be significant impact and we don't see that as a huge.
Tissue I think it's an easy target for someone to call out, but but not something that I believe is translating there.
From a services standpoint, when you look at our kind of key metrics.
You were up about 18% on pets per clinic, when we run those and so that's a pretty significant number over last year and were up.
About 10% since Q1, so we're seeing so acceleration in the pets per clinic.
Our average ticket last year, it was $88 and this year, it's over 100 hundred too.
Q1 was $95. So we saw another step change.
Big part of the 88 to one or two was price increases we took versus last year, but the change between Q1 and Q2 had no price changes.
Contemplated in that number and so we've always pride ourselves to be the 100 dollar visit and really doing that preventative care and that minor emergency stopped in that range and so it's in line is where we'd expect it to be and it's hitting our our margin criteria from from from that perspective.
Our community clinics are really doing well right now they've really accelerated back and we've put in place and a lot through John the last 60 days.
In place policies that are required and it's not to wait for the market to get back to 2019 to start doing things different and so we are putting in tougher operating.
Tricks to drive profitability and we have a we have a lot of aspirations for where that part of the business can be contributing in 2023.
Without having to get back to it can I.
2019 type operating kind of environment. So that's good as far as the.
Wellness centers go and how they're you know coming into the store base.
Again, we've never seen better tickets, we've never seen better pet counts accelerating they're still running about 15%, 20% behind where we'd want them to be at that 18 months. So there are a little behind where we want them to be some of that we believe is just the start stop in and getting.
Then back in and getting that awareness up and running but we definitely are starting to see that acceleration and obviously youll be able to see in the base how they're performing.
Very soon as they are part of the numbers and so I think.
We're still very optimistic about what they will contribute and how theyre going to perform in the long term value, they're going to add to the business and I think all of US have a lot of new things, we're working on with that model to bring more dollars and more profit dollars into the into it and we'll be excited to talk about those in the coming quarters as our.
John and others get more.
More time to develop those.
Yeah.
Our next question from John Lawrence with Benchmark. Please go ahead.
Alright. Thanks.
Cord could you comment a little bit about when you look at the retailers when you talk about their inventories and the trade down on pack size is there any chance that.
You get stocked out on some of those lower impact sizes in the left with the hiring them if you didn't sell.
Fortunate for Us John .
We don't have inventory issues.
Manufacturer ourself in Omaha, Nebraska, we have plenty of raw materials, and packaging and an active ingredients to make whatever we need and we're balancing our inventory levels perfectly to meet that.
Our partners, we distribute for we've been out in front of us with them showing in the trends in working with them on long term plans. So we don't believe we have any risk and not been able to capture every sales dollar that comes through the system.
As it comes relative to inventory and I think we demonstrated pretty clearly for the last two years during the pandemic when we were well over 99% fill rates even during the pandemic and such have tried.
Our supply chain in the last few years as you know this category.
<unk> did extremely well and we had to do with lots of.
Extreme increases in inventory needs during the pandemic to meet People's care, when they couldn't get into veterinarian. So.
We're well positioned and well trained to meet it I don't think we'll see any of those issues.
Be an issue in the back half of the year.
Yes last question for me just.
You've talked to.
A couple of times about I.
I guess from your new guidelines operational changes et cetera, coming next couple of quarters and then we've got some new product intros. So.
Would you say this sort of more nears is coming.
Early right fourth quarter would it be more like spring of 'twenty three.
Well I think.
There's a lot of different messages when we tell people that there's different operating procedures and things that we're doing in.
Anytime you come into an inflationary market and people start talking about recessions.
We're looking at everything as a business to make sure that.
We are running the business the way it was built that had that same entrepreneurial spirit that grid that do more with less.
A an attitude and so I think we've made a lot of acquisitions over the last four years they've been very good acquisitions, we've taken some time to look at.
Our business I think if you read into one of the <unk> commentary I think.
On lower sales, we still think we can generate the same leverage on SG&A by delivering that same SG&A as a percent, which most companies that have had sales pressure in this environment, you've seen deleveraging on earnings and deleveraging on those numbers and so I think we have put together plans and are employing those now to deliver this year.
Way that we think is prudent and without remotely putting the long term at risk. It's just it's the right way to run the company in this environment and being prepared for the future as it relates to <unk>.
Big ideas and things that we're doing in the marketplace that never changes no matter what the environment is we're trying to develop items that helped people get better access to affordable pet healthcare, we think theres, a healthy pet market out there with lots of <unk> to drive the future of this company and if the market is a little bit smaller in a tighter economic environment, it's still a very large market as needs for these.
Great idea is to be out there and we believe we're the best company in developing those executing those with the best retail partner relationships to execute on this pet health and wellness space and so we're still very bullish on the year and very happy where we're going as we said, it's not 10% growth year over year, but it is 4% growth year over year in a tough market and earnings.
We're up year over year.
And we're having to work harder to get it but that's what we're going to do so we are still very bullish on the company's performance our team the execution of our partnerships and our plans for the future. So hopefully that gives you a little insight to our thinking.
Great. Thanks for that good luck.
Our next question will come from Corey Grady with Jefferies. Please go ahead.
Hey, Thanks for taking my question and apologies if you've already addressed this but can you talk about performance and inventory levels by channel maybe.
But your brands and your distribution business, if you could talk about online versus brick and mortar and then within brick and mortar are there any notable differences. Thanks.
That'd be great Michael you want to take that please.
Yes, I think.
Korean general as cord and Zvi referenced earlier that there is definitely an overhang of inventory throughout Q2 due to the lack of consumption in the category and that overhang is falling over into Q3.
In terms of specifics I would say at an aggregate. We're looking at we can have the two weeks of drawdown that we need to continue to work through here in Q3.
That's going to vary widely by customer by item there are some customers and some brands, where we're chasing inventory and then there is other.
<unk> customers, where are they are very long on inventory, but at an aggregate I would say, we're looking at about a week and a half or two weeks left to bleed off as we work through the rest of Q3.
Got it thank you.
Thanks Corey.
There are no remaining questions and with that we will conclude our question and answer session. I would now like to turn the conference back over to management for any closing remarks.
We just like to thank everybody for joining us today, obviously, when we started 2022, we have a very different view of where the market was and what was happening with the consumer and it's been a.
Very difficult to have to take the step change to address what the market's doing we still feel extremely blessed that we're in such a great space and such great tailwind that we still are out delivering a significant.
Number for this year and feel great about the leverage we are generating to drive the same EBITDA margin percentages off of those sales that.
We are doing that so I think we're just grateful to our teams are working so hard to continue to work in this tough environment to deliver great results. We're grateful for all of our retail partners and how they continue to lean in as we look into 2023 and start to put plans together to be ready for next year and see a lot of exciting things coming so we really appreciate it when to join US today look forward are.
Dialog on the quarter and on a year and look forward to finishing 2022 as strongly as we can thanks everybody.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.