Q1 2023 PetIQ Inc Earnings Call

Excuse me. This is the conference operator, Thank you for your patience call will begin shortly please continue to hold thank you.

[music].

Good day and welcome to the Pet IQ, Inc. First quarter 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Katie Turner Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us on <unk> first quarter 'twenty eight 'twenty three earnings conference call and webcast on today's call are cord, Christensen, Chairman and Chief Executive Officer, and Vila Chief Financial Officer before we begin please remember that during the course of this call management may make forward looking statements within the meaning of the federal secured.

These law. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward looking statements.

Please refer to the company's annual report on Form 10-K, and other reports filed from time to time with 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 and I think Laura.

Or is there a non-GAAP financial measures. 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's release for a reconciliation of non-GAAP financial measures and the most.

Comparable measures prepared in accordance with GAAP.

But I keep 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 first quarter financial results.

I'll begin with an overview of key highlights then I'll review, our financial results for the quarter.

Finally, as we Michael and I will be available to answer your questions.

We are very pleased with our start to 2023, our team delivered first quarter net sales and adjusted EBITDA above our guidance for the quarter.

Net sales of $290 5 million topped our outlook of 270 million to $290 million.

So it's helped us achieve solid gross margin expansion and SG&A leverage resulted in record quarterly net income and adjusted EBITDA.

Both our products and services businesses performed well in the first quarter and we completed the complementary and strategic acquisition of Rockwell and Roxy on January 13th for $26 5 million in cash.

As we discussed on our call last quarter, Rocco and Roxy is a super premium brand with a strong and growing presence, particularly in the E Commerce sales channel.

With their pet product offerings, which today, primarily includes stain and odor products.

Acquisition also expands delek us offering into premium dog supplements and jerky treats.

We believe we have a tremendous opportunity to grow rockwood Roxy distribution beyond ecommerce to brick and mortar retail to accelerate growth of their existing business and e-commerce and to introduce new Skus in 2023 and beyond for all sales channels.

The products segment's net sales of $259 million increased four 5%.

Third to the prior year period, reflecting broad based growth across all product categories and sales channels.

When you look at all sales channels combined year over year consumption growth in the over the counter flea and tick category was the strongest that we've seen in the last 18 to 24 months during the first quarter of 2023.

In Q1 of this year over 50% of the over the counter flea and tick category sales were generated online and importantly, Patrick Hughes portfolio of brands continue to capture a disproportionate amount of this growth and dramatically outperformed the broader category as evidenced by our Q1 results.

As we've consistently said if you only look at the Nielsen measured sales channels or flea and tick.

Just a portion of the total category.

As a result Nielsen data does not tell the complete story for the category results and now represent less than 25% of the market volume for the OTC flea and tick category in which pet IQ competes.

We continue to believe that accused unique position in the market offering convenient and affordable veterinarian products and services has never been more valuable and needed by pet parents.

Turning to our product segment in more detail as I mentioned, our paddock your manufactured products outperformed the broader category in Q1.

Our largest and most critical category to enabling our financial results.

Excuse manufactured flea and tick business, which saw its best quarter of winning over pet parents.

Our acquisition of Paragon animal health in 2019.

When looking at our OTC flea and tick brands growth in all sales channels for the 12 weeks ended March 25th 2023, a few of the highlights from the quarter include.

Our portfolio of OTC flea and tick brands grew six 3% versus the markets growth of 4.1% leading to a gain of 31 basis points of share.

Included in last year's base for consumption of the low margin skus within the dollar channel that we strategically chose to discontinue.

If you move south of this product from the base our consumption for our portfolio of OTC flea and tick brands would be up over 12% and well ahead of the total category consumption.

Yeah.

Our pet supplement segment continue to see healthy consumption growth in the first quarter of six 5% as compared to the prior year period.

The slower growth in our pet supplements business versus the total category was expected and due to the planned transition of a significant skew in brick and mortar during the first quarter of 2023 as.

As a result, approximately eight weeks of sales were missed in Q1. This year that we had in Q1 last year. When you take this into account our pedigree of SAP on brands would have been up over 12% and better than the broader category consumption of 10, 9% for the period ended March 22023.

Importantly, we completed the SKU transition in Q1, and the early read across retailers as an acceleration in consumption.

In addition, our dental treats brand meant to use grew plus 22% and 36 basis points of share within the category dog treats increased 157% driven by our peer loved brand and overall consumption across all of pet IQ branded offerings and across all retail channels grew plus 10, 4%.

For the 12 weeks ended March 25 2023.

Okay. Thank you manufactured products represented 26, 2% of our product segment net sales in Q1 2023 compared to 28, 4% in Q1 of 2022 pro forma for the acquisition of Rockland ROTC.

Mix was slightly below our expectations for the quarter as our distributor business had a more aggressive inventory build with our top E Commerce partners late in the quarter How's.

However for 2023, we continue to expect to achieve our stated objective of having greater than 32% of product segment net sales from pet IQ manufactured products.

Now focusing on the services segment.

Our servicing segment reported first quarter 2023, net revenue of $31 5 million an increase of 12, 6%.

As compared to the prior year period and in line with our expectations.

We experienced improved cancellation rates increased pet counts and increased average dollar per pet served as compared to the first quarter of 2022.

Improved operating efficiencies and maturation of wellness centers helped US services segment achieved its best profit contribution quarter since fourth quarter of 2019.

We opened four wellness centers in the quarter and will continue to remain prudent with our services segment growth in 2023.

We believe we are well positioned across our products and services segments to attract more pet parents, who are health and wellness offerings and are very pleased with our team's execution and ability to generate strong results for the first quarter of 2023.

We remain optimistic about our opportunities for growth in 2023, and our data across all sales channels and our product segment for Q2 to date continues to show that that actually was performing well across all categories.

That said, we are still early in the year and our teams consistently focus on the controllable aspects of our business, but we are being prudent and reiterating our annual 2023 guidance given certain variables outside of our control like weather and timing of shipments for example that can lead to fluctuations quarter to quarter.

In closing.

We appreciate the hard work and dedication of our employees in our manufacturing and distribution facilities as well as our corporate offices.

With a commitment to our mission and core values and helping us to achieve these financial results with that overview I'd like to now turn the call over to Zee.

Thank you cord, we're pleased to achieve first quarter net sales and adjusted EBITDA ahead of our expectations.

I will discuss our quarterly financials in more detail and our outlook for Q2 and the full year of 2023 Q.

Q1, net sales were $295 million, an increase of five 4% compared to Q1 last year driven by an increase in sales for both the products and services segments as well as the addition of Rockwood Roxie.

First quarter 2022, gross profit increased 8% to $62 $3 million.

Nothing in the gross margin of 21, 4% an increase of 50 basis points from the first quarter of 2022, driven by higher profitability in the services segment.

Partially offset by a higher mix of distributed product based on the timing of shipments late in the quarter and from lapping new pet IQ manufactured brand launches in the prior year period and the product segment.

SG&A expenses for the first quarter of 2023, we're $43.3 million compared to $48 $2 million in the first quarter of the prior year.

Adjusted SG&A was $39 $3 million for Q1 of 2023 compared to $41 $4 million in Q1 last year.

As a percentage of net sales adjusted SG&A was 13, 5% a decrease of 150 basis points compared to the prior year period.

The decrease was mainly due to lower compensation expenses, resulting from operating efficiencies.

One time costs incurred in the prior year period, as well as lower legal expenses.

From a profit perspective, we reported record net income of $9 $8 million or EPS of <unk> 32 sets the highest in the company's history.

Adjusted net income for the first quarter of 2023 increased 46% to $14 $2 million and EPS was <unk> 45 cents.

Q1, EBITDA was $26 $7 million, an increase of 51, 9% compared to $17 $6 million in Q1 of last year.

First quarter, adjusted EBITDA was $30 $7 million, an increase of 25, 7% compared with $24 $4 million in the prior year period.

Representing an adjusted EBITDA margin of 10, 6% an increase of 170 basis points compared to Q1 of 2022.

Now turning to our balance sheet liquidity for the first quarter ended March 31st 2023, the company had total cash and cash equivalents of $25 $4 million.

Net cash used in operating activities was $43 $3 million for the first quarter ended March 31, 2023, compared to $45 $4 million used in operating activities for the prior year period.

The change in operating cash flows primarily reflects higher earnings partially offset by higher cash usage for working capital.

The company's working capital changes are driven primarily by growth in accounts receivable and inventory due to our normal seasonal profile.

While accounts payable growth provided working capital benefit driven by increase in inventory and timing of inventory purchases.

Our total debt was $452 million as of March 31, 2023, compared to $452 $9 million at the end of 2022.

Notably our total debt is down $30 million for the comparable period in 2022, despite $26 $5 million paid for acquisition of Rockwood Roxie.

In addition to our cash on hand, the Companys revolving credit limit is undrawn and it has $125 million of availability gap.

Together, representing total liquidity, which we define as cash on hand, plus availability of $154 million as of March 31 2023.

While we have no intention of making additional borrowings we would note that our liquidity is ample and our credit facilities are flexible.

Our net leverage as calculated under the terms of our credit facilities at the end of the first quarter 2023 was four five times consistent with the prior year period based on the timing of working capital needs to support the normal seasonality and growth of the business as well as the amount the company paid and the.

First quarter for its acquisition of Rockwood Roxie.

We expect Q1 to be the highest net leverage quarter of the year and we expect to continue to reduce our leverage over the next few years.

We believe net leverage at the end of 2023 will be lower than 2022.

We continue to believe our consistent growth contribution from the product segment and ongoing improvement in the services segment positions the company to drive free cash flow and build cash in future quarters, as well as opportunistically pay down our debt.

Now turning to our guidance.

For the year ending December 31, 2023, we are reiterating our guidance that the company previous provided on February 28, 2023, and as also noted in today's earnings release and financial presentation available on our website.

The second quarter of 2023, we expect net sales of $270 million to $280 million, an increase of approximately 9% compared to the prior year period based on the midpoint of the guidance.

Second quarter of 2023, we expect adjusted EBITDA of $24 million to $26 million, an increase of approximately 4% compared to the prior year period based on the midpoint of the guidance.

From an SG&A standpoint, there was approximately $1.5 million that we expect to spend in Q2 that shifted from Q1 of this year based on timing of advertising and promotions.

We remain optimistic about our opportunities for growth in 2023 and are focused on delivering value for all of our stakeholders as we execute on our mission of smarter convenient and affordable options for pet parents.

That concludes my financial review with that overview cord, Michael and I are available for your questions operator.

Yeah.

We will now begin the question and answer session.

I'll ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

If at any time your question has been addressed and you'd like to withdraw your question.

Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question comes from <unk> Creek with Oppenheimer. Please go ahead.

Good afternoon, and thanks for taking my question also congrats on a nice quarter.

So with the Rocco Roxy acquisition I was just curious how the integration is going so far and any surprises of note thus far.

Yes, I mean, no surprises so far refresh them. Thanks for the question, we've known them for a long time. We've studied the business. They had very few customers doing a very concentrated business. So for our ability to bring their inventory into our system starting to distribution start to really streamline things theres really been no surprises so far.

We did have some business they were testing that we viewed as non strategic that we decided to not continue with it didn't affect kind of the base earnings but it did affect some of the sales. So if you back that out look our currently running we still think we're on track.

Year over year grow the base, it's profitable the basic strategic.

20% kind of kind of run rate basis. So no surprises so far we're ahead of schedule.

Integration has gone extremely well and by the way against lots of white space and lots of things. We think we can do to increase distribution really.

Make things work and grow.

Michael Smith anything you'd add based on kind of your initial retailer conversations.

No. The only thing I would add is just some of the test as we have moved the brand in a brick and mortar.

Firstly on the supplement side, we've seen some better than expected trends in some real optimism as we see this brand.

Primarily playing in stain and odor today.

We're optimistic about the role they can play for us and some other premium spaces that we'd love to take the brand into over time and the early read on supplements is again.

While we initially modeled.

Great and then maybe just one follow up question on flea and tick category fairly upbeat commentary on what you guys are seeing so far I was just curious what you're seeing from a competitive promotional perspective in the category and I know at times last year. There were some retail inventory adjustments with their channels I'm. Just curious how are inventories are right now in the retail channel based on what you guys are seeing.

Yeah, Michael you are the best way to answer that so go ahead.

Yes. So the first part of your question in terms of promotional activity. We did see some aggressive programs by some of the more super premium brands earlier in the season at March.

If you look at the net of the results of those on the category and those brands not a meaningful contributor to our category performance or those brands performance.

In terms of retailer inventory levels.

I would say on the on.

On the whole on the aggregate no major overages or Enbridge is there are some slight customers, where we have one example, where they made a inventory replenishment system upgrade that is now flowing inventory more JIT. If you will to demand versus some of the historical patterns. We've seen in this category were.

Retailers would take a very aggressive early season.

Our approach to build inventory well ahead of demand.

But when you wash that all out across customers and brands, we're in a fairly healthy, but I would call a neutral inventory position across the retail channel.

Okay, great. Thank you I'll pass it along.

Thanks for the next question.

The next question comes from Jon Andersen with William Blair. Please go ahead.

Good afternoon everybody.

Okay.

Okay.

Hey.

E Commerce I think you said is now more than half of the OTC flea and tick business.

Could you just comment on.

Some of the again the trends that you're seeing there.

Whether you expect that to continue.

How how big e-commerce could become.

No.

If these trends persist and how you specifically how your business. Your brands are positioned outline. It sounds like you are performing well and taking share, but just discuss that a little bit that would be helpful. Thanks.

Thanks, John for the question I'll, let Michael I'll start and then I'll kind of clean up after it goes so go ahead Michael.

Yes, John I'd hate.

What the long term share of E. Commerce is going to be in this category, but I would tell you in the last two or three years. Its continued to be on a pretty consistent march of taking meaningful share and growth and actually growing the pie right. It's one thing to ship share in a category. It's another thing to actually grow the pie and one of the better things we've seen is E com.

<unk> has continued to grow in the flea and tick category is actually doing a great job of bringing new customers in or getting compliance to be higher than it would have been if consumers were just purchasing.

Britain brick and mortar environment. So on the aggregate healthy for the category and I don't see anything slowing that down candidly.

If you look at growth rates for that channel relative to the balance of market. We're seeing two three X the growth rate for e-commerce versus balance of market and for pet IQ, we are disproportionately outperforming and ecommerce for our portfolio of brands. If you go back three or four.

Years.

You would have heard US say, we were behind in that space. We were not as developed in ecommerce as we wanted to be I would say on that journey, we got caught up in 2022 and in 2023 were maybe more developed.

Then the category as a whole so for us it's definitely an engine for growth some of thats due to making meaningful investments in ensuring that we're winning in that environment and learning how to better utilize those investments over time.

We're in a phase where that flywheel is really starting to spin and getting some great return on those investments and disproportionately winning in that channel.

No I think I would add to the John as you know Michael and the team has put together a best in class team that we've invested in that's internal now.

Years ago, we were using external resources, we've continued to upgrade that team invest in that team and as always focus wins the day and that focus is you know clearly translate into our sales and our growth rates being better online and our brands performed better than what other brands are performing so we're happy with it we're going to continue to invest there and we see our brands.

You into expand and take share as we keep that focus on it.

That's helpful. Thanks, Thanks to both of you.

One follow up on the manufacturing business.

That came in I guess.

There's a proportion of your products business below your.

Your expectations up order it sounds like there were some kind of one time factor driving that.

Hum.

If anything <unk>.

With.

Respect to your view on on the manufacturing side of the business growth rates and.

And when you think about that part of your business.

Or do you see more opportunity on the health and wellness or on the wellness side or.

Or more opportunity on the flea and tick side or is it kind of you know both aspects.

Look I think we view that we have opportunity for growth in both categories, we're definitely more mature and more developed and flea and tick which means we have more opportunity in health and wellness and we've said that for many quarters, but that's an area of focus for us, but we have white space in different form factors and different brands and different things on that.

And tech side as well so I think we're.

I feel like we still have tons of runway across our portfolio to continue to grow.

As a company across our portfolio and we'll continue to I think show that in our numbers and our growth rates as we as we develop our business.

Anything else you'd add Michael.

Yes, I would just add that the way that you are looking at that data is from our ships out perspective, and there's always some lumpiness in the way that inventory flows, especially if you think back to last year, where we had a meaningful launch on our manufacturer side of the portfolio without a cure occurred in Q1 last year.

Sometimes a better look at consumption and if you look at consumption, you'll see our manufactured brand outperforming our distributed brand. So when you think of share of ships. It's gonna look one way a lot of that is about the base, but when you look at share of consumption and the health of our manufacturing portfolio consumer.

Consumption is probably a better way to the.

The cash that light.

Yeah, John just to be or we still are very clear that we are very very focused on the data. We're looking at the consumption numbers and we were definitely wanted to make sure everybody heard that we still think that 32% is achievable.

Prior.

In terms of priority first and foremost reinvest in the business that means things like supporting new brands are supporting our service business expansion and so forth next would be paying down debt. We anticipate the bat that that'll come down about a quarter of a turn between by the end of this year versus last year importantly.

<unk> last year, we peaked at a leverage rate of a five and Q2. This year. Our peak leverage is 4.5 Q1, so our leverage will come down the balance of the year and of course, if we get any great strategic acquisitions likely done. This year, we believe in R&R with rock Roxy and some of the past that.

Physicians those are always gonna be priorities for us as well.

Again, if you have a question. Please press Star then won the next question comes from Bill <unk> Securities. Please go ahead.

Thanks, Good afternoon.

Hi, Bill.

Just looking at.

Well I'll go with a a follow up.

Well, if you're looking at the percentage of sales from manufactured as he said you're comfortable getting back to that 32 per cent for the full year is there a particular quarter, where that will kind of over correct or do you expect it to be well above or be above 32 per cent for all through the next quarters.

So at the time I think she wanted it.

Yeah, Q1 was kind of an anomaly, we expected it to be a little bit lumpy for Q1.

Again, there was some distributor brands that got restock heavily at the end of the quarter that the students slightly but she was always our lowest quarter for manufacturer brands and the consumption numbers really tell the story, but as far as you know it's lovely not I think it'll be very evident through the rest of the year that we're on track in right.

Now consumption numbers are good we need to see how consumption is as we get into some of the bigger muncy how may as a big Mountain June July is a big month, but once we see those numbers I think we right now I feel very good about getting back from 32 per cent and it should be pretty level through the rest of the year.

Got it [noise] and then for the.

The margin improvement.

For services, certainly Martin improving overall is impressive of the quarter, but just trying to understand a lot of that has to do with a calm. So the last year. We were still in an economy still had some absenteeism, we still at some other kind of issues. So you know is there other things we can look at to see that it's sequentially. It's it's really.

<unk> plan or or <unk>, you know really see some meaningful margin improvement as we sequentially moved the rest of the year.

Yeah for sure I think we were deliberate and using the words in line with our expectations because as you said in the last couple of quarters. You know the first thing. We did is we right size. The P&L based on today's economy. It's working we're seeing that flow through the numbers I mean.

Yes, we saw a significant improvement or last year, but he's had a very low comp on margin due to lots of things coming out of Covid.

When you look at the rest of the year, you're going to see it be closer to prior year.

But we still think over last year for total year, we should see 350 basis points of improvement just in running the business better healing of cancellation rates and other things that are really driving the business, but again, we've got very disciplined operators right now running the piano properly and went up pinos round properly with the right discipline. It can return to these type of numbers, but.

Yes, it was a significant improvement almost a thousand basis points or more than a thousand basis points of improvement of a prior year.

Mmm I might've missed but was there a difference in terms of mobile clinics that you're running versus even the the fourth quarter of last year.

Yeah. The exact number I don't have it right in front of me I know cancellation rates are the best they've ever been in our our veterinarian pool for the mobile clinics as the best it's been since 2019 are comparable to 2019, which is a lot of the hills, but again I think we've been running kind of on a run rate of similar to the number of plenty some prior year and have not ran.

Yeah. It will start looking to ramp it further beds you know John if you're on you can comment.

Yeah, we did 22000 clinics. So that's breaks up between community clinics, we did 13300 and wellness centers 9000 versus last few waited 20493. So increases just over 2000, just left in 2000 clinics.

Oh, that's great. Thanks for the color.

Facebook.

The next question comes from Cory Grady with Jeffries. Please go ahead.

Hi, Thanks for taking my questions. So in the press release, you mentioned continued trade down.

Can you have more color on what you're saying in terms of consumer behavior. I think last year you saw both consumers trained down.

To lower Kia and sticking with premium of buying smaller pack sizes are.

So curious what you're seeing at this point and how that pleasant your outlook for the ear. Thanks.

Michael You Wanna go ahead and take that.

Sure the same trends from a tray down perspective are maintaining in the category. This year as we start to anniversary some of the Timeframes of last year. When we saw some of that behavior. One of the things that is bouncing back a bit is the Max is transition we are seeing consumer.

There's trade back up and pack size, if you will so even though they've gone to a new brand and decided to stay there. They are now looking at the overall value of that brand proposition and going back into some of those larger back sizes across the category.

[noise] got it that's helpful. Thank you and then last quarter you talked about our services test concepts you are running with an expanded menu of services can you hear me talk about how those pilots are performing in any additional or <unk>.

[noise] initial learning thanks.

Yeah. Thanks for the question Yeah, we.

Now expanded to where we have I believe John three locations. The fourth one opening shortly to have been open for a period of time they are performing.

Out our expectations and it's very simple we have a menu of services that are done.

They don't require the veterinarian to be present and allow us to.

Service really those things that people need to be doing other pets every single month. So instead of you know the vet services that are 1.2 times a year. It's more of a you know annualized kind a monthly thing heavily weighted towards a subscription plan that builds over time. The subscription program is on track as far as that we would see a building.

Our intention is to continue to <unk>.

Cast those existing locations add more to it through the rest of the year to try and perfect. The P&L, but right now we're very pleased that we have these additional revenue opportunities that are very close to our average ticket, but allow a frequency that is significantly more often which.

Anytime you can add a service that's similar in size that from a ticket perspective, but can be there you know.

10 to 12 times, a year versus 1.2 times, it's a win so so far.

Feeling very good about it we're not to claim victory, but feel very good about the revised kind of outlook on an approach to just doing more to help you will take it out better care of their pets more frequently.

Thank you.

Again, if you have a question. Please press Star then one and with a follow up from John Anderson with William Blair. Please go ahead.

Thanks for the follow up I I Wanna add Rocco in Roxy.

Can you remind me like.

How much of that business is is in the E Commerce channel today, and and how much is through you know an individual or a couple of skews you mentioned concentration I'm, just trying to get a better sense for that.

That concentration byproduct and channel.

In the context of what opportunities that offers you to kind of expand that broaden broaden the reach of that business.

Thanks for the question John Mike will go ahead and please.

Yeah on the aggregate the E com business for R&R is greater than 80%.

The net cells and within that it's a greater than 70%.

Is the staying in order business, which is predominantly it to skew business. There are other offerings, but those two skews or the hero skewed that's what the brand launched with over time has been expanded into other segments and we're continuing on that journey of taking those brands are taking that brand finding new categories that resonate with consumers that again <unk>.

We mentioned earlier supplements is one that we've recently explored in Manhattan with attraction.

And are you.

We were able to produce or do you produce those <unk>.

Products and house, how how how how are the.

Or the products made today and will that change in the future.

Yeah, I think Johnny no currently they're made with contract manufacturers rocket Roxy did not have their own manufacturing uhm, none of the items that they currently sell or things that we couldn't produce.

Right now we have a lot of other things going to where the benefit from those may not be the top of our list them from a priority standpoint.

Adding new skews and adding points of distribution and add another thing to rocket Roxy wood for a better benefit, but there's no doubt where analyze it and looking at it to see if there's.

A reason to do it but there's not a anything we couldn't produce and generate a additional synergy for the business. We chose to do that at some point, but right now we are not intending to do anything different right now.

Okay. Thanks, so much goodbye.

Thanks So.

And we have a question from John Lawrence with benchmark. Please go ahead.

Good afternoon.

Hi, John .

Yeah Cold would you talk a little bit about you mentioned the services business, a little bit and just dig into that a little further the absentee rates. What what are you really things happening on that side of the business and I know every.

You know every part you can get down it's a lot more profitable can you speak to that just a little deeper dive there.

Yeah, I think in general we're still challenged hiring veterinarians in the market is still difficult to.

Attract and and <unk>, it's difficult for everybody that that's a common piece of knowledge it's out in the market.

The community clinic visits as you know is supported by 10 99, that's looking to add shifts and extra work and we're now well above 3000 vets in that pool, which is consistent with what we were at our peak in 2019.

Based on that pool will be at that five that's now bidding for those ships are cancellation rates are now in the single digits and we've seen improvement every quarter from that so we had our best kind of improvements between January and now it's already time, you can run more shifts of less cancelation, you're gonna see improved margins and profits and so we we see that part of the <unk>.

<unk> killed extremely well so we are a company that's very good at moving veterinary labor around to where the demand is for pets to be treated we continue to evaluate how we continue to do that in a way that will that labour is there we have the Max number of pets to see you to create the spread and returned that we deserve to have as a company and for our shareholders.

<unk> I think we're looking at a lot of things as we look at the model look at the market look at what's going on but we feel really good about the improvement that's coming through and we feel even better about the team that's executing that business on behalf of the company that will be half of the shareholders. So the change and step change in how we look at our P&L are performed.

And how do we measure success is is definitely something that you're seeing float through now and the margin creation in and the contribution to the company's performance. So lots of good work being done it's still an area, where we see tons of upside the consumers love what we do we're helping you will save money, it's more convenient for them and now we're just add.

Some additional analytics and execution discipline to to figure out the best way to bring that needed service to the market.

Great. Thanks, and just to follow up I mean, obviously this recent performance.

You said, you're you're doing the the case work and and and all of them.

But work to study that obviously with the retailer. This improved performance probably helps that growth profile as you look at that business guys going forward.

Yeah, I mean, we've never had an issue with the retailers they've always been happy with us and and with our performance, we say very close to them from a communication perspective on what's happening with the company how the business performing what we're doing so there's no surprises.

The reality of it is we have great relations with all of them, but they all want Lord I mean, they love what we do they love the traffic it builds they love the conversion it creates a new purchases a pet products that are stores and so.

The pressure is always just damn us everybody wants more and so we're figuring out models that will allow us to do that so the base business that we started from his I would call back to 95 per cent healed place and now we just need to increase the number of clinics that were running that based business.

The wellness center and some of the you know re imagination that Johnson working on is making substantial progress. We're very excited about it probably the most energize we'd been a very long time and you know, we're very close to being able to sit down and have more of a meaningful conversation, where we can show people. What we're doing how we're thinking about it and why are we go forward with it but yeah I think.

We we've had enough time now with Covid and the paused.

Look at what goes on how it goes on and how our company's position to strategically be better and different than most so.

We're gonna get spot.

Right. Thanks good.

Good luck.

Yep.

This concludes our question and answer session I would like to turn the conference back over to court Christiansen plenty closing remarks.

Yeah, just thank you for joining us today, we're extremely pleased with our ability to deliver sales and adjusted EBITDA above with the guidance that we provided and we're very happy with the execution, we receive from all of our employees across the company to do that.

Retail partners and partnerships that continue to be loyal and help us take our mission Ford of helping people save money on their basic health care needs for their pets. So thanks for joining US we look forward to talking to you again and then a few months on the next quarter as we continue to be optimistic about our ability to deliver the full year and deliver the subsequent quarters. So thanks for joining us everybody will.

Talk to you soon.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].