Q4 2023 PetIQ Inc Earnings Call

Operator: Good day, and welcome to the PetIQ Inc. fourth quarter and full year 2023 earnings conference call. All participants will be in listen-only mode.

Good day, and Bell can easily pet IQ, Inc, fourth quarter and full year 2023 earnings conference call.

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Operator: To withdraw your question, please press star, then 2. Please note that this event is being recorded. I would now like to turn the conference over to Katie Turner, Investor Relations. Please go ahead.

Please note that this event is being recorded.

I'd now like to turn the conference over to Katie Turner Investor Relations. Please go ahead.

Katie M. Turner: Good afternoon. Thank you for joining us on PetIQ's fourth quarter and full year 2023 earnings conference call and webcast. For today's prepared remarks, we'll hear from Corey Christensen, Chief Executive Officer, and Zvi Glasman, 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 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 with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risks that could cause Azure's results to differ materially from those expressed or implied in any forward- 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 to substitute for the financial information presented in accordance with GAAP.

Katie M. Turner: Good afternoon. Thank you for joining us on Kodak is fourth quarter and full year 2023 earnings conference call and webcast for today's prepared remarks, you'll hear from spark President and Chief Executive Officer, Anthony Bachman, Chief Financial Officer before I begin. Please remember that during the course of this call.

Katie M. Turner: Management may make forward looking statements within the meaning of the federal Securities laws.

Katie M. Turner: They're based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or that was described in any forward looking statements.

Katie M. Turner: Please refer to the company's annual report 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 break email 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.

Katie M. Turner: non-GAAP financial measures, 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 discuss it for the financial information presented in accordance with GAAP. Please.

McCord Christensen: Please refer to today's release for definitions and a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. And, in addition, please refer to PetIQ's investor website for a supplemental presentation. And with that, I'd like to turn the call over to McCord Christensen. Thank you, Katie. And good afternoon, everyone.

Katie M. Turner: Please refer to today as really for definitions and a reconciliation of non-GAAP financial measures unless comparable measures prepared in accordance with GAAP.

Katie M. Turner: And then he referenced that I gave at Investor website, or a supplemental presentation and with that I'd like to turn the call over to cord question Ben.

Ben: Thank you Katie and good afternoon, everyone. We appreciate you joining us today to discuss our better than expected fourth quarter and full year 2023 financial results.

McCord Christensen: We appreciate you joining us today to discuss a better than expected fourth quarter and school year 2023 financial results. I'll begin with an overview of key highlights, then Zvi will review our financial results for the quarter and outcome. Finally, Zvi, Michael, John, and I will be available.

Ben: I'll begin with an overview of key highlights and he will review our financial results for the quarter and outlook.

Ben: Finally, the Michael John and RPG available to answer your questions.

McCord Christensen: Our team started 2023 with the goal of generating a little over a billion dollars in net sales and adjusted even out of 89 million based on the midpoint of our guidance. I'm proud to report that after consistently exceeding our expectations quarter after quarter in 2023, we finished the year significantly better than we anticipated. When compared to the prior year, our 2023 net sales increased 20% to a record $1.1 billion, and our adjusted E-value increased approximately 35% to $105 million. Our stronger than expected 2023 net sales led to favorable leverage of our cost and expenses and strong profit contribution, which helped fuel record annual cash from operations of $61.9 million and pre-cash flow of $52.7 million, much higher than the $30 to $40 million we projected. And finally, our net leverage was a record low 2.9 times as of December 31st, 2023.

Ben: <unk> started 2023 with the goal of generating a little over a billion dollars of net sales.

Ben: Adjusted EBITDA of 89 billion based on the midpoint of our guidance.

Ben: I'm proud to report that after consistently exceeding our expectation quarter after quarter in 2023.

Ben: Finished the year significantly better than we anticipated.

Ben: When compared to the prior year, our 2023 net sales increased 20% to a record $1 1 billion and our adjusted EBITDA increased approximately 35% to $105 million.

Ben: Our stronger than expected 2023, net barrels led to favorable leverage across an extensive and strong profit contribution which helped fuel record annual cash from operations of $61 9 million.

Ben: And free cash flow of $52 7 million much higher than the 30 to 40 million we projected.

Ben: And finally, our net leverage was at a record low two nine times as of December 31 2023.

McCord Christensen: Looking to our total growth in 2023, I'd like to emphasize the power of the product segment and, most importantly, PetIQ's portfolio brand. As we've discussed in the last few quarters, when you look at all sales channels combined for 2023, we had one of the strongest seasons in the last 10 years for the over-the-counter flea and tick category. For 2023, product segment net sales were $968.2 million, an increase of 21% compared to 2022. And even more impressive are the net sales of PetIQ's brand, which increased 28% and exceeded our growth expectations for the year. These results demonstrate the strength in the planning and execution of our entire team.

Ben: Looking to our total growth in 2023, I'd like to emphasize the power of the product segment and most importantly, <unk> portfolio of brands.

Ben: As we've discussed in the last few quarters. When you look at all sales channels combined for 2023, we had one of our strongest season in the last 10 years for the over the counter flea and tick category.

Ben: For 2023 product segment net sales were $968 2 million, an increase of 21% compared to 2022.

Ben: More even impressive or the net sales.

Ben: These brands, which increased 28% and exceeded our growth expectations for the year.

Ben: These results demonstrate the strength in the planning and execution of our entire team.

McCord Christensen: We are building significant brands in the pet categories that are growing online and at brick and mortar retail while capturing a disproportionate amount of market share. Across our PetIQ manufacturer brand, we continue to see great returns on our enhanced advertising and promotional efforts, as evidenced by our growth, recalls. We told you that we plan to spend more on marketing in the second half of 2023. Our marketing budget for 2023 was $40 million. Midway through the year, we communicated that we would spend an incremental $4 million on marketing, $3 million of which we recorded in Q4 of 2023. So in total, for 2023, we spent $44 million to support our brand. We expect this investment to have a longer-term payback for the brand beginning in 2024. Included in our 2024 executive guidance, which we will review, is an incremental $12 million of market expense. This is on top of the $44 million that we spent in 2020.

Ben: We are building significant brands in the pet category, but our growing online and brick and mortar retail while capturing a disproportionate amount of market share.

Ben: Across our products you've manufactured brands, we continue to see great returns on our enhanced advertising and promotional efforts as evidenced by our growth.

Ben: Recall, we told you that we plan to spend more on marketing in the second half of 2023.

Ben: Our marketing budget for 2023 was $40 million.

Through the year, we communicated that we would spend an incremental $4 million of marketing 3 million of which we recorded in Q4 of 2023. So in total for 2023, we spent $44 million to support our brands.

Ben: We expect this investment to have a longer term payback or brand beginning in 2024.

Ben: Including our 2024 adjusted EBITDA guidance would you what would you is it an incremental $12 million of marketing expense. This is on top of the 44 million that we spent in 2023.

McCord Christensen: Six million of this, we told you on our last earnings call, will be funded by the savings from the services segment optimization, and the remaining six million we expect to fund from cash from operations. Our team will continue to lean into prioritizing investments and initiatives that we expect to support the long-term success of our brand. We expect these efforts to drive outplace growth in the coming year and beyond.

Ben: Nonetheless, we told you on our last earnings call will be funded by the savings from the services segment optimization and the remaining $6 million, we expect coupons from cash from operations.

Ben: Our team will continue to lean into prioritizing investments and initiatives that we expect to support the long term success of our brands.

Ben: We expect these efforts to drive outpaced growth in the coming year and beyond.

McCord Christensen: Now I'd like to discuss a product segment in more detail. For Q4 of 2023, the product segment contributed a net sales of $191.3 million, an increase of 22% compared to the prior year period. The growth in Q4 of this year was broad-based across all product categories.

Ben: Now I'd like to discuss our product segment in more detail.

Ben: The Q4 'twenty three the product segment contributed net sales of $191 3 million, an increase of 22% compared to the prior year period.

Ben: The growth in Q4 of this year it was broad based across all product categories.

McCord Christensen: [inaudible] increased 13.2%, and PetIQ plans increased 28.2%. PetIQ's portfolio brands continue to capture a disproportionate amount of the growth online and dramatically outperform the broader category, as evidenced by our market share results. For the 12 weeks ended December 30, 2023, PetIQ's over-the-counter free intake brands captured 17.5% of the category dollars, which is an increase of 205 basis points versus the prior year period. Most of this share growth was driven by gaining unit share as we picked up 190 basis points as we picked up 190 basis points as we picked up 190 basis points as we picked up 190 basis points as we picked up 190 basis points as we The PetSupplement category also maintained its growth trajectory in the quarter, gaining 14.4% over the prior year period. This past growing category has now more than doubled over the last four years and has surpassed the over-the-counter flea and tick category.

Ben: In the fourth quarter of 2023, the battery grill.

Ben: A positive 13, 2% and.

Ben: And parents use plans increased 28, 2%.

Ben: <unk> portfolio of brands continue to capture a disproportionate amount of our growth online and dramatically outperformed the broader category as evidenced by our market share results.

Ben: For the 12 weeks ended September 30th 2023.

Ben: Over the counter flea and tick brands captured 17, 5%.

Ben: The category dollars, which is an increase of 205 basis points versus the prior year period.

Ben: Most of this share growth was driven by gains in unit share as we picked up 190 basis for the quarter.

Ben: The past couple of category also maintained close trajectory in the quarter came in 14, 4% over the prior year period.

Ben: This fast growing category have now more than doubled over the last four years.

Ben: Surpass the over the counter flea and tick category.

McCord Christensen: That couple of them now represent the largest category that our pet supplement products continue to see accelerated consumption and growth in the fourth quarter of 2023, where our offerings in this space grew plus 23.5% compared to the prior year period. Our strong household penetration trends, along with expanded need states in the pet supplement category, give us confidence that these double-digit growth rates should continue for many years to come, and PetIQ is positioned very well to continue to gain share in this important category. Recently, we completed tests for a premium supplement offering under the Rockland-Roxy brand and are excited about a full product launch at the end of Q1.

Ben: A couple of times now represent the largest category that we compete in.

Ben: Our pet supplement products continue to see accelerated consumption growth in the fourth quarter of 2023.

Ben: Offerings in this phase III, plus 23, 5% compared to the prior year period.

Ben: Strong household penetration trends along with expanded needs based on the past government supplement category give us confidence that these double digit growth, which should continue for many years, Tom Cat IQ is positioned very well to continue to gain share in this.

Ben: Important category.

Ben: Recently, we've completed tests for a premium stuff on operating under the Rockland Rocky brands.

Ben: Talking about a full product launch at the end of Q1.

McCord Christensen: We look forward to providing you with more details on the product performance in the coming months. In addition, our pet, dental, and treat offerings outperformed the Catering Q4. The Menti's and PureLove brands went through a two-times growth, leading to meaningful share gains. The Mimpi brand grew plus 36% and gained 61 basis points of share in the Dentistry category.

Ben: We look forward to providing you with more details on the product performance in the coming months.

Ben: In addition, our pet dental and treat offerings outperformed the category in Q4, and Memphis and peer loved brands go through at two times, the category leading to meaningful share gains.

Ben: Dementing brand grew plus 36%.

Ben: 61 basis points of share in the dental suite category. The pure luxury brand also continues to gain momentum as opposed to the outstanding growth of 184% in Q4 versus a year ago.

McCord Christensen: The Pure Love Tree brand also continues to gain momentum as it posted outstanding growth of 184% in Q4 versus the year ago. The newest brand in our product portfolio, Rocker & Roxy, grew at a positive 21.2 percent for the fourth quarter of 2023, also well ahead of our. Remember, we exited several non-core Rockwell and Rothschild offerings in the first half of 2023 that we determined were not a strategic fit. And yes, our team is executing well, and we are very pleased to have grown the base business better than expected for the quarter and full year. Our co-owners, Rockwood Roxy Products, are focused on the premium cut and stain odor category, and pet parents continue to look to Rockwood Roxy for their stain and odor needs in Q4.

Ben: The newest brand and our product portfolio of Rockwood Rafi grew at a positive 21, 2% for the fourth quarter of 2023 also well ahead of our projections.

Ben: Remember, we exited several non core Rocco and ROTC offerings in the first half of 2023.

Ben: We determined were not a strategic fit for us and yet our team is executing well.

Ben: And we are very pleased to grow the base business better than expected for the quarter and full year.

Ben: Color Rocco and velocity products that focus on the premium, but in saying that other category and pet parents continue to love to work with Rafi photo stain and odor need in Q4.

McCord Christensen: We believe the Rata Rati brand can expand its growth in other premium categories like supplements and treats. We are very encouraged about the brand's success thus far. 2024.

Ben: We believe the Rockwell Rocky brands can extended scope and other premium categories like supplements entry. We are very encouraged about the brand's success thus far.

Ben: For 2024, we are excited about increasing distribution of Morocco, and ROTC premium pet offerings.

McCord Christensen: We are excited about increasing distribution of Rocco and Roxy's premium pet offerings as we increase advertising and promotional investments to build brand awareness and consumption over the next several years. Now focusing on the services, on an annual basis in 2023, the services segment net revenue increased 10.4% to $133.8 million compared to 2022. And for Q4, the services segment net revenue was $28.6 million, an increase of approximately 7% compared to the prior year period, although the segment gross profit dollars and margins showed decreases due to our optimization efforts. We closed 140 wellness centers in the second half of 2024.

Ben: We increased advertising and promotional investments to build brand awareness and consumption over the next several years.

Ben: Now focusing on the services segment.

Ben: On an annual basis in 2023, the servicing segment.

Ben: 10, 4% to $133 8 million compared to 2022.

Ben: And for Q4. The subsequent segment net revenue was $28 6 million, an increase of approximately 7% compared to the prior year period.

Ben: Gross profit dollars and margin showing decreases due to our optimization efforts.

Ben: We closed the 100 and figuring wellness centers in the second half of 2024. This includes 45 wellness centers in Q3, and the remaining 104 in Q4 to improve future profitability.

McCord Christensen: This included 45 wellness centers in Q3 and the remaining 104 in Q4 to improve future profitability. We ended 2023 with 132 wellness centers in operation. We believe this is the right decision for our total business. Our optimizations have helped us to better align our investments in the areas of our business where we expect to achieve the highest rate of return. Our collaboration with an existing resale partner on a new pilot wellness center offering continues to go well. We offer a variety of pet services, including veterinary services, as well as grooming and hygiene care.

Ben: We ended 2023 with a 132 wellness centers in operation.

Ben: We believe this is the right decision for our total business. Our observations have helped us to better align our investments in the areas of our business, where we expect to achieve the highest rate of return.

Ben: Our collaboration with an existing retail partner on a new pilot Wellness Center offering continues to go well.

Now for a variety of pet services, including veteran services as well as grooming and hygiene chair.

McCord Christensen: We are testing and learning together and remain optimistic about the options for this format in 2024. In closing... I'd like to thank our PetIQ employees located in our headquarters, our facilities in Omaha, Springdale, and Daytona, and everyone in the 39 states offering our veterinarian services who always help us achieve our strong annual results.

We're testing and learning together and remain optimistic about the options for this format in 2024.

In closing I'd.

Ben: I'd like to thank our production employees located at our headquarters.

Ben: Utilities in Omaha.

Ben: Springdale in Daytona and everyone in a 39 states offering a veterinarian services.

Ben: Always help us achieve our strong annual results.

McCord Christensen: Your commitment to our mission and core values creates a strong culture for success. With your consistent work and dedication, we are well-positioned in 2024 and beyond to capitalize on the robust pet industry tailwinds and provide smarter, more convenient access to affordable pet health and wellness products and veterinary services. With that overview, I'd like to now turn the call over to Cord. Thank you, Cord. We are very pleased with the company's strong finish to 2023. Our team capitalized on our opportunities for growth, as evidenced by the strong growth in our PetIQ brand portfolio, and we took important strategic steps in the second half of the year to increase operating efficiencies and make planned marketing investments to fuel our growth and success into 2024 and beyond.

Ben: Commitment to our mission and core values creates a strong culture for success.

Ben: With the consistent work and dedication we are well positioned in 2024 and beyond to capitalize on the robust pet industry tailwind and provide smarter more convenient access to affordable pet health and wellness products and veterinary services.

With that overview I'd like to now turn the call over to Vicki. Thank you cord. We are very pleased with the company's strong finish to 2023.

Vicki: Our team capitalized on our opportunities for growth as evidenced by the strong growth in our pet IQ brand portfolio and.

And we took important strategic steps in the second half of the year to increase operating efficiencies and make planned marketing investments to fuel our growth and success into 'twenty 'twenty four and beyond.

McCord Christensen: I will now discuss our quarterly financials in more detail and finish by reviewing our first quarter and full year 2024 guidance. We've reported record Q4 net sales of $219.9 million, an increase of 19.5% compared to Q4 of last year, driven by an increase in sales from both the products and services segments, as well as the addition of Rocco and Rocco Marine. As Cord mentioned, we had strong, broad-based growth across sales channels and product categories. Adjusted gross profit for the fourth quarter of 2023 was $45.6 million, and adjusted gross margin was 20.7%. Our adjusted gross profit included a drag of approximately $1.2 million, or 60 basis points, from our services segment optimization and related cost inefficiencies that we did not adjust for in the quarter.

Vicki: I will now discuss our quarterly financials in more detail and finish with reviewing our first quarter and full year 2024 guidance.

Vicki: We reported record Q4, net sales of $219 $9 million, an increase of 19, 5% compared to Q4 of last year driven by an increase in sales from both the products and services segments as well as the addition of Rockwood Roxie.

Vicki: Cord mentioned, we had strong broad based growth across sales channels and product categories.

Vicki: Adjusted gross profit for the fourth quarter of 2023 with $45 $6 million and the adjusted gross margin was 27%.

Vicki: Our adjusted gross profit included a drag of approximately $1.2 million were 60 basis points from our services segment optimization.

Vicki: And the related cost inefficiencies that we did not adjust for in the quarter.

Zvi Glasman: If you take this into account, our fourth quarter 2023 adjusted gross margin would be essentially flat compared to the prior year period at 21.3%. Q4 adjusted SG&A was $40.6 million compared to $34.7 million in Q4 last year. As a percentage of net sales, adjusted SG&A was 18.5%, a decrease of 40 basis points compared to the prior year period.

Vicki: If you take this into account our fourth quarter 2023, adjusted gross margin would be essentially flat compared to the prior year period at 21, 3%.

Vicki: Q4, adjusted SG&A was $40 6 million compared to $34 $7 million in Q4 last year.

Vicki: As a percentage of net sales adjusted SG&A was 18, 5% a decrease of 40 basis points compared to the prior year period.

Zvi Glasman: This improvement was primarily a result of continued leverage of cost and increased business expense efficiencies relative to growth and net sales, partially offset by incremental and planned marketing expense of approximately $3 million to support the long-term health of our manufactured brand portfolio. Total restructuring and related charges attributable to the service segment optimization were $5.1 million for the fourth quarter of 2023, $1.6 million of which were cash charges. Thus, the majority of the restructuring was non-cash in the quarter. We included a financial table in today's press release to provide you with the components of expenses included in restructuring and cost of services for modeling purposes. We currently expect our cash costs associated with the services optimization to be less than $5 million, below the initial expectations we provided last quarter of over $6 million. Adjusted EBITDA for the first quarter of 2023 was $12 million.

This improvement was primarily as a result of continued leverage of costs.

And increased business expense efficiencies relative to the growth in net sales, partially offset by incremental planned marketing expense of approximately $3 million to support the long term health of our manufactured.

Vicki: And portfolio.

Vicki: Total restructuring and related charges attributable to the services segment optimization were $5 $1 million for the fourth quarter of 2020 $311.6 million of which were cash charges. So the majority of the restructuring was non cash in the quarter.

We included a financial table in today's press release and provide you with the components of expenses included in restructuring and cost of services for modeling purposes.

Vicki: We currently expect our cash costs associated with the services optimization to be less than $5 million below the initial expectations, we provided last quarter of over $6 million.

Vicki: Adjusted EBITDA for the fourth quarter of 2023 was $12 million.

Zvi Glasman: This exceeded our implied guidance of $6.2 to $10.2 million for the quarter. Adjusted EBITDA for the fourth quarter of 2023 also includes the approximately $3 million of incremental and planned marketing expense I mentioned earlier. Turning to our balance sheet and liquidity, the company ended Q4 with total cash and cash equivalents of $116.4 million. The company generated a record $61.9 million of cash from operations for 2023.

Vicki: This exceeded our implied guidance of six 2% to $10 $2 million for the quarter.

Vicki: Adjusted EBITDA for the fourth quarter of 2023 also includes the approximately $3 million of incremental and planned marketing expense I mentioned prior.

Vicki: Turning to our balance sheet and liquidity. The company ended Q4, with total cash and cash equivalents of $116 $4 million.

Vicki: The company generated a record $61 $9 million of cash from operations for 2023.

Zvi Glasman: And we generated the highest fleet cash flow in the company's history of $52.7 million, well in excess of our initial expectations of $30 to $40 million. For 2024, we expect to generate annual free cash flow in excess of $45 million. The company's total debt, which is comprised of its term loan, ABL, convertible debt, and capital leases, was $445.2 million as of December 31st, 2021.

Vicki: And we generated the highest free cash flow in the company's history of $52 $7 million well in excess of our initial expectations of $30 million to $40 million.

Vicki: For 2024, we expect to generate annual free cash flow in excess of $45 million.

Vicki: The company's total debt, which is comprised of its term loan ABL convertible debt and capital leases with $445 2 million as of December 31, 2023.

Zvi Glasman: In addition to our cash on hand, the company's $125 million ABL is undrawn. Photo Liquidity, which we define as cash on hand plus debt availability, was $241.4 million as of December 31st, 2021. [inaudible] Our net leverage, as calculated under the terms of our credit facilities at the end of 2023, was a record low 2.9 times, much better than our expectations for 2023. Our net leverage as calculated under the terms of our credit facilities at the end of 2023 was a record low 2.9 times, much better than our expectations for 2023, and net leverage improved from 3.7 times in 2020. Looking ahead, keep in mind Q1 is always our highest-leverage quarter of the year. So for Q1 of 2024, you will see our net leverage increase a bit due to seasonal changes in working capital, primarily potential timings of increased inventory, to position us well for the flea and tick season. However, on a year-over-year basis, we expect an improvement in our net leverage ratio relative to Q1 of last year.

Vicki: In addition to our cash on hand, the Companys $125 million ABL is undrawn.

Vicki: Total liquidity, which we define as cash on hand, plus debt availability was $241 4 million as of December 31 2023.

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

Vicki: Our net leverage as calculated under the terms of our credit facilities at the end of 2023 was a record low two nine times.

Vicki: Much better than our expectation for 2023.

Vicki: Our net leverage as calculated under terms of our credit facilities at the end of 2023 was a record low two nine times.

Vicki: Much better than our expectations for 2023, and net leverage improved from three seven times in 2022.

Vicki: Looking ahead keep in mind Q1 is always our highest leverage quarter of the year.

Vicki: So for Q1 of 2024, you will see our net leverage increase a bit due to seasonal changes in working capital primarily potential timing of increased inventory to position us well for the flea and tick season. However on a year over year basis, we expect an improvement in our net leverage ratio relative to Q1 of last year.

Zvi Glasman: Now, turning to our guidance. As stated in today's earnings release, our 2024 full-year and first quarter 2024 outlook is inclusive of the services segment optimization, the expected sale of the company's foreign subsidiary, Mark and Chappell, and a return to a more normal flea and tick season as compared to the record seasonal patterns experienced in 2023. These three items total approximately $52 million in net sales and $8 million of adjusted EBITDA on an annual basis.

Speaker Change: Now turning to our guidance.

Speaker Change: As stated in today's earnings release, our 2020 for full year and first quarter 2024 outlook is inclusive of the services segment optimization do you expect the sale of the company's foreign subsidiary Mark in Chapel, and a return to a more normal flea and tick season as compared to the record seasonal pattern.

Speaker Change: <unk> experienced in 2023.

Speaker Change: These three items total approximately $52 million in net sales and $8 million adjusted EBITDA on an annual basis.

Zvi Glasman: If you take these into account, our growth in 2024 would be significantly higher or represent a net sales increase of approximately 10% and an adjusted EBITDA increase of approximately 15% as compared to 2023. We have broken these variables out for reference in the Outlook section of today's earnings presentation, posted on the Investors section of our website. Inclusive of the variables I just mentioned, we expect 2024 net sales of $1,130,000,000 to $1,180,000,000, an increase of approximately 5% based on the midpoint, and adjusted EBITDA of $109 million to $114 million, an increase of approximately 6.5% based on the midpoint, which includes the step-up in marketing expense cord management. For the first quarter of 2024, we expect net sales of $290 million to $310 million, an increase of approximately 3% based on the mid-term.

Speaker Change: If you take these into account our growth in 2024 would be significantly higher or represent a net sales increase of approximately 10% and an adjusted EBITDA increase of approximately 15% as compared to 2023.

Speaker Change: We have broken these variables out for reference in the outlook section of today's earnings presentation posted on the investors section of our website.

Speaker Change: Inclusive of the variables I just mentioned, we expect 2024 net sales of $1.130 billion to $1.180 billion, an increase of approximately 5% based on the midpoint.

Speaker Change: And adjusted EBITDA of $109 million to $114 million, an increase of approximately six 5% based on the midpoint, which includes the step up in marketing expense core dimensions.

Speaker Change: For the first quarter of 2024, we expect net sales of $290 million to $310 million, an increase of approximately 3% based on the midpoint.

Zvi Glasman: Adjusted EBITDA of $31 to $33 million, an increase of approximately 4.5% based on the. As noted in today's release, we expect our annual net sales to be weighted to the first half of 2024 with approximately 56% of our projected annual net sales recorded in this period versus 55% in 2023. However, annual seasonality can vary based on the timing of shipments, promotional activity, product launches, and a number of

Speaker Change: Adjusted EBITDA of 31% to 33 million an increase of approximately four 5% based on the midpoint.

Speaker Change: As noted in today's release, we expect our annual net sales to be weighted to the first half of 2024 with approximately 56% of our projected annual net sales recorded in this period versus 55% in 2023.

Speaker Change: Annual seasonality can vary based on the timing of shipments promotional activity product launches and a number of other factors.

Zvi Glasman: Additionally, for modeling purposes, we wanted to mention that going forward, our share count will vary during the course of the year due to the accounting rules regarding the company's convertible notes. This will depend on a number of factors, including quarterly earnings. For certain quarters in 2024, the share count will increase by approximately 4.8 million shares, and our diluted EPS will be calculated on the same basis.

Speaker Change: Additionally for modeling purposes, we wanted to mention that going forward our share count will vary during the course of the year due to the accounting rules regarding the company's convertible notes.

Speaker Change: This will depend on a number of factors, including quarterly earnings.

Speaker Change: We're certain quarters in 2020 for the share count will increase by approximately $4 8 million shares and our diluted EPS will be calculated on the same basis.

Zvi Glasman: Importantly, we currently have no intention of satisfying our convertible note obligation with shares but are required to report the company's share count based on the theoretical. In closing, we reported strong record 2023 financial results. Our team continues to execute well and deliver on our strategic initiatives to fuel growth and increase operating efficiency. For 2024, we expect to increase value for all stakeholders as we deliver on our mission of smarter, convenient, and affordable pet health and wellness for parents. That concludes my financial review. McCord, Michael, John, and I are now available for your questions. Operator. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad.

Speaker Change: Importantly, we currently have no intention of satisfying our convertible note obligation with shares what are required to report the company's share count based on the theoretical increase.

Speaker Change: In closing, we reported strong record 2023 financial results.

Speaker Change: Our team continues to execute well and deliver on our strategic initiatives to fuel growth and increased operating efficiencies.

Speaker Change: For 2024, we expect to increase value for all stakeholders as we deliver on our mission of smarter convenient and affordable pet health and wellness for parents.

Speaker Change: That concludes my financial review cord, Michael Jon and I are now available for your questions operator.

Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

Operator: If you are using a speakerphone, please pick up your handset before pressing begin. To withdraw your question, please press star then. Our first question comes from Rupesh Parikh on Oppenheimer. Please go ahead. Good afternoon, thanks for taking my question, and also congrats on a strong end to the year. So maybe just starting out with guidance. We'd just love to hear, you know, as you look at the guidance range, where you see sources of upside, and at the same time, where do you see the biggest risk in achieving the guidance range? Yeah, thanks, Rupesh, and thanks for the comment on the year.

Rupesh Dhinoj Parikh: Our first question comes from fish Parikh with Oppenheimer. Please go ahead.

Rupesh Dhinoj Parikh: Good afternoon, and thanks for taking my question and also congrats on a strong end to the year.

Rupesh Dhinoj Parikh: So maybe maybe just starting out with guidance, we just love to hear you know as you as you look at the guidance range, where you see sources of upside and at the same time, where where do you see the biggest risk in achieving and keeping to the guidance range.

Speaker Change: Yes, thanks for patch in patient that comes out of the year, we did have a great year and I appreciate the question.

McCord Christensen: We did have a great year, and I appreciate the question. You know, obviously, we talked about the $52 million that we discussed, and it's, you know, easy to see if we sell off M&C, and we had the stores that we closed. That's easy. The flea and tick season, which we talked about here, how great it was, we always budget at an average rate.

Speaker Change: You know, obviously, we talked about the $52 million that we discussed and it's easy to see if we sell off and fee than.

Speaker Change: We have the stores that we closed that that's easy.

Speaker Change: Putting fixed season, which you talked about your how great. It was we always budget at an average rate and so as we get into the season and we started to see the whether it's a big source of upside for the company and for the business. We've had a really strong last year, which led to a really strong retailer reception of our.

McCord Christensen: And so as we get into the season, and we start to see the weather, it's a big source of upside, you know, for the company and for the business. We had a really strong last year, which led to really strong retailer reception of our products and our promotions and placement. And once we see consumption, that's, you know, the source of upside.

Speaker Change: Products in our promotions and placement and once we see consumption that's the source of upside there.

Speaker Change: So the very same items or the opposite right. So we've been very good at capturing where we think where you are and when things go better than expected. It is much stronger so.

McCord Christensen: So we've been very good at capturing where we think we are, and when things go better than expected, it's much stronger. So I don't know, Michael, is there anything else you want to add to that? Now, Rupesh, this is Michael.

Speaker Change: I don't know Michael if anything else you want to add it up.

Speaker Change: Now I'll refresh this is Michael I think <unk> said, it well weather and the quality of the flea and tick season. The greatest variable we have to both the upside or the downside and again, we kind of shutting it down the middle of the fairway for expectations that are built into the guidance.

Michael A. Smith: I think McCord said it well, weather and the quality of the Pacific seasons are the greatest variables we have to either the upside or the downside. And again, we kind of are shooting it down the middle of the fairway for expectations that are built into the guidance. You know, we do have a couple meaningful launches this year, specifically our Rocco and Roxy supplement line, which we're just assuming we can carve out a relatively small piece of the premium supplement pie with that launch. But we are very encouraged by very early testing and readings.

Speaker Change: We would have a couple meaningful launches this year, specifically, our Rocco and Roxy supplement line, which.

Speaker Change: We're just assuming we carve out a relatively small piece of the premium supplement pie with that launch, but we are very encouraged by a very.

Speaker Change: Early testing in Reeves.

Michael A. Smith: That would be one area that we could see some meaningful upside as that launch plays out in the back half of the year, but those are probably the biggest variables that we see coming up in 24. And then maybe just one follow-up question. So, as we, you know, I know there's some noise with gross margins in Q4, and it was very helpful to get an explanation there in terms of what the adjusted gross margins are. But is there any guidance you can provide in terms of how to think about it for Q24? And I don't know if there's a way to think about product versus service as well. Yeah, this is Zvi, Cord, if that's okay.

Speaker Change: That would be one area that we could see some meaningful upside as that launch plays out in the back half of the year, but.

Speaker Change: Those are probably the biggest variables that we see coming up in 'twenty four.

Speaker Change: Right and then maybe maybe just one follow up question. So as you know and I know, there's some noise with gross margins in Q4. It was very helpful to get an explanation there in terms of what their what the adjusted gross margins are but is there any guidance you can provide in terms of how to think about it for 24 and I don't know if there's a way to think about product versus service as well.

Speaker Change: Yeah. This is Vic cord. If that's okay. We think we have 50 basis 50 basis plus of margin upside next year and as we think about it what we control is our manufacturing our.

Zvi Glasman: We think we have 50 basis points plus of margin upside next year, and as we think about it, what we control is our manufactured products and their growth rates. They have had exceptional growth this year, and we expect exceptional growth next year as well. So, as you think about why our margin percentage could be lower, the only reason our margin percentage would be lower is if distribution exceeds our expectations and delivers more margin dollars, and in that case, we'd have a lower gross margin percentage, but we'd all be happy because the higher gross margin dollars we'd have, and conversely, or in addition, we'd have higher EBITDA dollars. So, that's how we think about it, and I don't, I mean, it's hard to imagine doing much better than we have been doing the last several years in manufacturing, but we're going to try. Okay, great. Thank you, Apostle. Our next question comes from Bill Chappell with Truist Securities. Please go ahead.

Vic: Our manufactured products and their growth rates and they have had exceptional growth. This year and we expect exceptional growth next year as well. So as you think about why our margin percentage could be lower or is there a margin percentage would be lower is it distributed exceeds our expectations and delivers more margin dollars.

Vic: And in that case, we would have a lower gross margin percentage, but we'd all be happy because of higher gross margin dollars, we'd have and Conversely. Our in addition, we would have a higher EBITDA dollars. So that's how we think about it.

Speaker Change: I don't I mean, it's hard to imagine.

Speaker Change: <unk> doing much better than we've been doing the last several years in manufacturing, but we're going to try.

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

Speaker Change: Our next question comes from Bill Chapell with Trust Securities. Please go ahead.

William Bates Chappell: Hi, Thanks, good afternoon.

William Bates Chappell: And congratulations as well.

William Bates Chappell: Two questions. The first is maybe help us on the bridge.

McCord Christensen: Thanks, good afternoon. And congratulations as well. Two questions. The first is, maybe help us bridge the EBITDA bridge from last year to 2024 with the services shut down. And I thought it was $5 to $6 million in savings.

William Bates Chappell: EBITDA for last year or two to 2024 with the services shut down and I thought it was $5 million to $6 million in savings didn't know what you saw in the fourth quarter because it sounded like there was actually a I guess a negative hit to gross margin from that whats youre expecting that to add to gross.

McCord Christensen: I didn't know what you saw in the fourth quarter because it sounds like there was actually, I guess, a negative hit to gross margin from that. What are you expecting that to add to gross margin this year, and then from that standpoint, how are we factoring in how you're reinvesting all of that if you are reinvesting all of that upside? All right.

William Bates Chappell: Arjun this year and then from that standpoint like how.

How are we.

William Bates Chappell: Factoring in how you're reinvesting all of that if you are reinvesting all of that upside.

McCord Christensen: Thanks, Bill. I appreciate it. Good to hear your voice. Look, we've been consistently saying that we're going to step up our AMP investment. You know, we've had to grow into our advertising investments and pay them ourselves along the way, and $6 million that we're going to be saving from the operating losses that we had from those stores we closed is going to fund half of that $12 million increase. The other $6 million we're going to fund out of operations, but that is $12 million that if we weren't continuing to push and drive our awareness and our brands and the return we're getting on that We were very efficient and worked very quickly to get the stores closed, and the expenses associated with that did have an impact on the end-of-the-year margin, and we've talked about that as well.

Arjun: Alright, Thanks, Bill appreciate it good to hear your voice.

Arjun: Look we've been consistently saying that we're going to step up our A&P investment we've had to grow into our advertising investments and pay them ourselves along the way and one six.

Speaker Change: $6 million that we're going to be saving from the operating losses that we have from those stores. We closed is gonna be funding half of that $12 million increase the other 6 million, we're going to fund out of operations, but that is $12 million that if we weren't continuing to push and drive our our awareness in our brands.

Speaker Change: The return we're getting on that about $12 million would have been available to take to the bottom line and increase our EBITDA from a company perspective, we.

Speaker Change: We were very efficient and worked very quickly to get the stores closed and the expenses associated with that did have an impact on the end of the year margin that we've talked about that as well.

McCord Christensen: As it relates to 2024, we should be back to kind of a normal state, you know, with our services organization and be kind of in a good place. I think going it would be any kind of a negative drag would be, you know, we're really starting to push forward more community clinics and any time we open a new community clinic store, there is a maturing process in place, but like I said, all that's been conservatively considered and is part of our guide going into next year, and as Zvi said, right now, we believe we're on track to have 50 basis points of margin And the only good change that we believe is that the distribution portfolio will outperform during 2024. Is there anything else I missed there?

Speaker Change: As it relates to 2024, we should be back to a kind of a normal state.

Speaker Change: With our services organization.

Speaker Change: Can you kind of at a good place I think it would be any kind of a negative drag would be for we're really starting to push forward more community clinics and anytime we open a new community clinic store.

Speaker Change: There is a a maturing process takes place, but like I said all of that has been considerably considered and is part of our guide going to next year and as we said right. Now. We believe we are on track to have 50 basis points of margin expansion hormone.

Speaker Change: And the only thing would change that we believe is the.

Speaker Change: Distribution portfolio outperformed during 2024.

Speaker Change: Zane anything else I missed there.

Zane: The only I would add is we did not add back the cost of the inefficiency of running the.

Zvi Glasman: The only note I would add is we did not add back the costs of the inefficiency of running the wellness centers that we announced would close in Q4. And so that dragged our 2024 Q4 margins down about $1.2 million and had an impact on services margins. Services margin in Q4 would have been closer to 8%.

Zane: The wellness centers that we announced would close in Q4, and so that dragged our growth our 2020 for Q4.

Speaker Change: Margins down about $1 million up $1 $2 million and had an impact of services margins services margin in Q4 would have been closer to 8%.

Speaker Change: So that's a little bit of noise that we have in <unk>.

Speaker Change: And the Q4 and if we look at our performance year over year full year 24 versus 23, if you exclude that $1.2 million, we'd be up about 50 basis points on an adjusted basis year over year for growth.

Zvi Glasman: So that's a little bit of noise that we have in the Q4. And if we look at our performance year over year, full year, 24 versus 23, if you exclude that $1.2 million, we'd be up about 50 basis points on an adjusted basis year over year for growth.

Speaker Change: I'm, sorry, 23 versus 22 minus my bad.

Speaker Change: Got it.

Speaker Change: I think I understand.

Speaker Change: Understand the cushion per se.

Switching just to your own company owned products and the success this past year.

Speaker Change: How much of that.

Speaker Change: Do you think.

Zvi Glasman: My bad. I got it. I think I understand the cushion, per se. Switching just to your own company-owned products and the success this past year, how much of that do you think is... We've certainly heard some of the more super-premium products within PET. How much of that do you think is just expanded distribution and availability, such as Spaco and Roxy and others on the supplement side? Any way to characterize how that is and whether you expect that to continue going into 2024? Michael, do you want to take that one? Yeah. Hey, Bill, it's Michael.

Speaker Change: Yeah, we certainly heard some.

Speaker Change: But of more super premium product.

Speaker Change: Product split within pet how much of that is you think is just expanded distribution and availability such as bakugan.

Speaker Change: Rocco and Roxy and another on the supplement side.

Speaker Change: Any way to kind of characterize how that is and whether you expect that to continue going into 2024.

Speaker Change: Michael you want to take that one.

Speaker Change: Yeah.

Michael: Hey, Bill its Michael.

Michael A. Smith: You know, I think that there are two components, right? We're competing in very healthy categories, and that is helping us. Flea and tick had an unusually healthy year based on some of the seasonal profile, but the more organic fundamental health of the categories like supplements and dental treats, we do think are sustaining and maintaining into 2024 and beyond. And if you look at how we've positioned ourselves in those categories, yes, we have historically had more of a value tilt to our portfolio, and we are benefiting from new consumers coming into the category. Primarily, there is some trade-down. But those brands' presence in the marketplace continues to evolve. And the biggest growth driver for us is really getting our ACV right, continuing to take brands that have a legacy of being in a single channel, being very productive and successful in those channels, and expanding them into some of our retail partners beyond kind of where they grew up. And I would say we're still in the relatively early innings of that journey, and in 2024, a pretty healthy step change for And just to follow up, do you think that will happen with the spring resets?

Michael: I think that there is.

Michael: Two components right. We are competing in very healthy categories that is helping us flea and tick had unusually healthy year based upon some of the seasonal profile, but the more organic fundamental health of the categories like supplements in dental treats we do think.

Michael: Our sustaining and maintaining and the 2024 and beyond and if you look at how we've positioned ourselves in those categories. Yes, we have historically had more of a <unk>.

Michael: Now you tilt to our portfolio and we are benefiting from new consumers coming into the category, primarily there is some trade down.

Michael: Those brands presence in the marketplace continues to evolve and the biggest growth driver for us is really getting our ACB rate continuing to take brands that had a legacy of being in a single channel being very productive and successful in those channels and expanding them into some of our retail partners beyond kind of where they grew up.

Michael: And I would say, we're still in the relatively early innings of that journey and in 2020 for a pretty healthy step change for us and getting some of those brands broader exposure in the marketplace that will be.

Part of driving growth and continue to take share moving forward.

Speaker Change: And just a follow up do you think that happens with the spring resets. We will see this in the next couple of months in terms of expanded ACB.

Michael A. Smith: You know, we'll see that in the next couple of months in terms of expanded ACV. For the health and wellness category, we'll see most of our major retail partners turning over those sets in the next four to six weeks. The treats category plays out a little bit later in the year, more towards the back end of Q2.

Speaker Change: Yes for the health and wellness category will see most of our major retail partners turning over those sets in the next four to six weeks.

Speaker Change: The treats category plays out a little bit later in the year more towards the back end of Q2, and we will see some of those changes.

Michael A. Smith: And we'll see some of those changes benefit us more in the back half of this year. Great. Thanks to Keller. Our next question comes from Kaumil Gajrawala with Jeffreys. Please go ahead.

Speaker Change: That is more in the back half of this year.

Speaker Change: Great. Thanks for the color.

Speaker Change: Our next question comes from Camel Duchow Ela with Jefferies. Please go ahead.

Operator: Hey guys, good afternoon, good evening, whatever it might be. Just a quick point of clarification, the 50 basis points of margin upside, I think that means expansion for 24 on gross margin. Is that what you had said earlier, Zvi?

Speaker Change: Hey, guys, good afternoon or evening, whatever it might be.

Just one quick point of clarification, the 50 basis points of margin upside do you think that means expansion for 24 on gross margins that were you had said earlier.

Zvi Glasman: Correct. Okay, just clarifying that. And then maybe just thinking about marketing, how are you thinking about the right amount? You obviously have quite a bit of growth; it's worked over the course of 23.

Speaker Change: Correct.

Speaker Change: Okay, just clarifying that.

Speaker Change: And then maybe just thinking about marketing how are you thinking about the right amount.

Speaker Change: We should have quite a bit of growth it's worked well.

Speaker Change: Over the course of 'twenty three.

Speaker Change: Hum.

McCord Christensen: Is this the right level? Does it make sense that, if you have the brands have heat, the brands have traction, that now's the time to maybe overspend a bit to kind of keep it going or set itself to a higher level? Is maybe just giving us some... context on how you're thinking about what the right figure is.

Speaker Change: Is this the right level does it makes sense to.

Speaker Change: If you have the brands have heat the brands have traction that now is the time to maybe overspend a bit.

Speaker Change: To kind of keep it going or set itself to a higher level, just maybe just giving us some.

Speaker Change: Context on and how Youre thinking about what the right figures.

McCord Christensen: Yeah, I think we don't know that we've found the ceiling yet. We're seeing the return on the investment we're making; it's working. We're going to continue to invest. The good news is that the commitments are 30 to 60 days.

Speaker Change: Yeah, I think what we are we don't know that we found a ceiling yet we're seeing the return on the investment we're making it's working.

Speaker Change: And that's the good news is that.

Speaker Change: Commitments or 30 to 60 days and so if we feel like we've hit a ceiling has kind of pulled back we will.

McCord Christensen: And so if we feel like we've hit a ceiling, it's time to pull back; we will. But we've, like, we've been growing into that. You know, budget and what we could spend and afford to spend over the last couple of years. This is another significant step up, and as we've seen, it's working. When we see the ceiling, we'll pull back, and until we do, until we see the right level of return and acceleration, then we're going to continue. But we haven't met a company that just went out there and spent a ton of advertising dollars and hoped it would work.

Speaker Change: But we've been growing into that.

Speaker Change: Budget, and what we could spend and afford to spend over the last couple of years. This is another significant step up as we've seen it's working when we see the ceiling will pullback and until we do that we see the right level of return and the acceleration that we're going to continue but.

Speaker Change: We haven't been a company that just went out there and spend a ton of advertising dollars.

Speaker Change: Hoped it would work we had to kind of grow into it keep a balance on all aspects of our P&L and our ratios and I think we've been very responsible about it and this next step up we feel great about it.

McCord Christensen: We had to kind of grow into it, keep a balance on all aspects of our P&L and our ratios, and I think we've been very responsible about it. And this next step up, we feel great about it because of how it has worked this year. And we haven't yet seen what the right level is, you know, from a standpoint of pulling back or pumping the brakes.

Speaker Change: Because of how it works this year and we haven't yet seen what the right level is from a standpoint of pulling back or pumping. The brakes. So I think we're continuing to balance the P&L and what we need to do as a company in the next step ups going to be we think very valuable to continuing to accelerate the brand's performance and <unk>.

Speaker Change: The company and frankly, just increases the depth and width of our moat.

McCord Christensen: So I think we're continuing to balance the P&L and what we need to do as a company. And the next step up is going to be, we think, very valuable to continuing to accelerate the brand's performance and protect the company, and frankly, just increases the depth and width of our moat. Okay, great. That's useful. Thank you. Again, if you have a question, please press star then 1. Our next question comes from Jon Andersen with William Blair. Please go ahead. Good afternoon. Thanks for the question. Well, most of it has, I guess.

Speaker Change: Okay, great that's useful thank you.

Speaker Change: Again, if you have a question. Please press Star then one.

Speaker Change: Our next question comes from Jon Andersen with William Blair. Please go ahead.

Jon Robert Andersen: Good afternoon, and thanks for the question.

Jon Robert Andersen: Our most most have been asked.

Jon Robert Andersen: I guess.

Jon Robert Andersen: One question I have is focusing a little bit more on the services business.

Jon Robert Andersen: Yes.

Jon Robert Andersen: Could you give us an update on where things stand with services there.

Operator: You know, one question I have is focusing a little bit more on the services business. Could you give us an update on where things stand with services? There are kind of three things in my head.

Jon Robert Andersen: Got kind of three things in my head.

Jon Robert Andersen: The community clinic business.

Jon Robert Andersen: Which seem to like.

Jon Robert Andersen: It's operating well, but if you could kind of give us an update on.

McCord Christensen: We've got the community clinic business, which seems like, you know, it's operating well, but if you could kind of give us an update on, you know, staffing levels, cancellation rates, and how you're moving ahead there in 24, remaining wellness centers. Are you at kind of a https://www.patreon.com? And then you mentioned a partner who you had piloted, I think, a program in one of their How is that going, and do you expect more positive news? on that front, perhaps with respect to further rollout there in 2024. Thank you. Thanks for the question, John. It's good to hear your voice.

Jon Robert Andersen: Staffing level.

Jon Robert Andersen: Cancellation rates and how you're moving ahead there.

Jon Robert Andersen: In 'twenty four and then we have the the.

Jon Robert Andersen: The remaining wellness centers are you at kind of a.

Jon Robert Andersen: Status quo. There now are good base level and what are the plans for those in terms of converting them potentially to brought a broader service offering.

Jon Robert Andersen: And then you mentioned a partner who you had piloted.

Jon Robert Andersen: Hum.

Jon Robert Andersen: Our program in one of their large stores, how is that going and do you expect more positive news.

Jon Robert Andersen: On that front, perhaps with respect to further rollout there in 2024.

Speaker Change: Thanks for the question John Good to hear your voice.

McCord Christensen: The community clinic business is a bright spot for the company. We have the ability to schedule labor, you know, when the demand is right from a pet count perspective, and we pay that labor better than anybody in the country from a rate standpoint, so we really are seeing the cancellation rates balance out and do well. We are starting to lean in to increase the number of clinics that we're running. It's part of our plan for 2024. It's also part of the way we're recovering the lost revenue that we got from closing the wellness centers that were unproductive and why we expect that, you know, business to be up a little or flattish versus negative, you know, from the closures. The wellness center model, you know, we have challenges because of the labor model, and we really need to lean into a model that uses kind of a community-like model where we can have the veterinary labor there when it needs to be there and not have it overstaffed when it's not.

Speaker Change: Excuse me like business is a bright spot for the company, we have the ability to schedule labor you know again when when the demand is right from a pet count perspective.

Speaker Change: And we pay that labor better than anybody in.

Jon Robert Andersen: In the country from a rate standpoint, so we really are seeing the cancellation rates balance out and do well.

Jon Robert Andersen: We are starting to lean in to increase the number of clinics that were running it's part of our plans for 'twenty 'twenty. Four is also part of the way. We're recovering the lost revenue that we got from closing the wellness centers that were unproductive and why we expect that business to be up a little flattish versus negative from the closures.

Jon Robert Andersen: The Wellness Center model we.

Jon Robert Andersen: They have challenges because the labor model and we really need to.

Jon Robert Andersen: Lean into a model that you use as kind of a community clinic model, where we can.

Jon Robert Andersen: Have you know the the vet labor there when it needs to be there and not have it overstaff when it's not in our test of adding hygiene services allows us to happen are those still going we think we're probably.

McCord Christensen: And our tests of, you know, adding hygiene services that allow that to happen are still going on. We think we're probably going to finish up our testing at the end of Q3 to really kind of finish up our testing and decide what our expansion plans look like. The wellness centers that were left, as we've said in past quarters, have the ability to be converted, or they're already growing and working and have the right labor balance, you know, in those markets. And so that's where we currently sit with our wellness center plan, but we're not out there building more stores until we kind of work through this last phase of the hygiene model, and our growth is really coming from that expansion in the community clinic business. Obviously, we did talk about last quarter. We had a significant new opening with one of our largest retail partners. It went extremely well. It was a gorgeous facility.

Jon Robert Andersen: The end of Q3 to really kind of finish up our testing and decide what our expansion plans look like the wellness centers that were left as we've said in past quarters.

Jon Robert Andersen: Have the ability to be converted or they're already growing didn't work you didn't have the right labor balance.

Jon Robert Andersen: Those markets and so that's where we currently sit with our wellness Center plan, but we're not.

Jon Robert Andersen: Out there building more stores until we kind of work through this last phase of the hygiene model and our growth is really coming from that expansion on the community clinic.

Jon Robert Andersen: Business, obviously, we did talk about last quarter, we had a significant new opening with one of our largest retail partners. It went extremely well it was a gorgeous facility. The best we've put out there in the market. It is branded that retail partners brand and we operate it for them we built it out we.

McCord Christensen: The best we've put out there in the market is branded that retail partners brand, and we operate it for them. We built it out. We furnished it with everything.

Jon Robert Andersen: Instead with everything it is doing better than what we thought it was going to be doing from a from a production and pet count perspective, and so they're happy we're happy and I think where we're close to announcing that we would open more locations, we're not there yet but we're close.

McCord Christensen: It is doing better than we thought it was going to do from a production and pet count perspective, and so they're happy, we're happy, and I think we're close to announcing that we would open more locations. We're not there yet, but we're close. Okay. That's helpful. Just one more on the sales growth guidance. 24. Understand it. It's a kind of a, Accounting for the headwinds that you quantified, it's kind of a 10% probe here, inclusive of the headwinds, mid-single digit.

Jon Robert Andersen: Okay.

Speaker Change: It's helpful.

Speaker Change: Just one more on the sales growth guidance for 'twenty four understand it it's a kind of a.

Speaker Change: Accounting for the headwinds that you quantified it as kind of a 10%.

Speaker Change: Growth here.

Speaker Change: Inclusive of the headwinds mid single digit.

McCord Christensen: Can you help us just think through the, https://www.patreon.com? It creates, you know, more noise than maybe usual. So if there's any color around that segment level growth expectations, that'd be helpful. Thank you.

Speaker Change: Can you help us just think through the.

Speaker Change: To break down their product versus services.

Jon Robert Andersen: Youre expecting.

Jon Robert Andersen: And one of the reason I'm asking is just given that the service center closures.

Jon Robert Andersen: You know creates more noise than usual so if theres any.

Jon Robert Andersen: Color around that.

McCord Christensen: Thanks, John. Look, I think we are in a year where we're doing exactly what we normally do, and our manufacturer brands are going to be in the low double digits. Double digits, and we feel great about that. And if the weather comes through, it'll be significantly better than those numbers that are in the plans. The distributor brands were still in the same kind of mid-single-digit step of growth rate, so we think that's conservative and the right place to be based on what we're seeing. Services is, you know, slavish because of the closures, if you're looking on a year-over-year basis.

Jon Robert Andersen: Segment level growth expectations that'd be helpful. Thank you.

Speaker Change: Thanks, John look I think we are.

Speaker Change: In a year, where we're doing exactly what we normally do where our manufacturer brands are going to be in the low double digit low double digits, and we feel great about that and if the weather comes through it will be significantly better than those numbers that are in the plan. The distributor brands. We're still the same kind of mid single digits type of.

Jon Robert Andersen: Growth rates. So we think that's conservative in the right place to be based on what we're seeing.

Jon Robert Andersen: Services is flattish because of the closures if youre looking on a year over year basis, but again, we think the right way to really measure our success is to take into account the $52 million, we talked about and we're.

McCord Christensen: But again, we think the right way to really measure our success is to take into account the $52 million we talked about, and we're up 10% top line, 15% bottom line, which is in line with what we think this business should be growing for the long term. Right, and you're taking the savings. [inaudible] You know, all of a sudden, the 111 midpoint is going to be, you know, 123. So. We're doing the right things for the long term. We're investing in the business for the long term. We're clearly getting better and better all the time. And look, we've had four quarters in a row this year where I think, you know, the numbers and execution speak for themselves. It makes sense.

Jon Robert Andersen: We're up 10% top line, 15% bottom line, which is in line. What we think this business should be growing for the long term.

Speaker Change: Right and you're taking the savings from the closures and reinvesting it in higher ROI opportunities.

Speaker Change: That's why we're getting some additional momentum out of that in the rally like we said before I mean were putting in $12 million more in the A&P that we're self funding.

Speaker Change: Out of the business that 12 million and we had the option to take the bottom line.

Speaker Change: All of a sudden the 111 midpoint is going to be you know.

Speaker Change: 123 so.

Speaker Change: We're doing the right things for the long term, we are investing in the business long term we're clearly.

Speaker Change: Getting better and better all the time and.

Speaker Change: Look we've had four quarters in a row this year that I think they will.

Speaker Change: The numbers and execution speak for themselves.

McCord Christensen: Thank you very much. Thanks, John. Our next question comes from Ryan Meyers with Lake Street. Please go ahead. Thanks for taking my question. Just thinking about the marketing investments, just, you know, wondering if you can speak to that a little bit and maybe how you've seen some of that pay off or flow through the model. And then, you know, maybe how much of these marketing investments are baked into the revenue guidance. Thanks, Ryan. Look, I think, you know, that's, you know, you're a pet person. You have your dog barking in the background, right?

Speaker Change: It makes sense. Thank you very much.

Speaker Change: Sean.

Speaker Change: Our next question comes from Ryan Meyers with Lake Street. Please go ahead.

Ryan Meyers: Hey, guys. Thanks for taking my question I'm, just thinking about the marketing investments just wondering if you can speak to that a little bit and maybe how you'd seen some of that pay off and flow through the model and then maybe how much of the marketing investments are baked into the revenue guidance.

Speaker Change: Thanks Ryan.

Speaker Change: Thank you Don.

Speaker Change: That's you know you're a pet perceive your dog barking in the background right.

Speaker Change:

McCord Christensen: Um, Look, all of our projections bake into everything that we're spending on the business. Obviously, we want to be conservative when we test a few things that are new in the programs. And so I think we've been, as usual, reasonable as we've done all year. You know, all year, and that's why we've given the ranges all year on how we thought we'd perform. And I think everyone's seen how our investments from consumerism have ended up allowing us to be, you know, better than midpoint consistently.

Ryan Meyers: Like all of our projections baked into everything that we're spending into the business. Obviously, we want to be conservative when we test a few things that are new in the programs.

Speaker Change: So I think we've been as usual reasonable as we've done all.

Speaker Change: You know all year and that's why we've given the range is all year on how we thought we would perform and I think everyone's seen how our investments from a conservatism have ended up allowing us to be you know.

Speaker Change: Better than the mid points consistently so.

McCord Christensen: I don't know if there's anything else, you know, Michael, and Zvi, you want to add, but I think that's all been captured in our current revenue projection. Yeah, you know, you make marketing investments in a lot of different parts of what we call the marketing funnel, right? Some of them are more near-term impactful, and some of them are more long-term impactful.

Speaker Change: I don't know there's anything else you know Michael do you want to add but I think that's all been captured in our current revenue projections.

Speaker Change: Yes.

Michael: You make marketing investments and a.

Michael: Lot of different parts of what we call the marketing funnel right. Some of them are more near term impactful some of them are more long term impactful.

Michael A. Smith: And we've got a healthy mix of investments in 2024 that'll influence both. So, yes, it's factored into our guidance, but much of those investments are by design intended to pay out in more than a one-quarter, one-year point of view. Got it. Thanks for taking my question. Again, if you have a question, please press star then 1. Our next question comes from John Lawrence with Benchmark. Please go ahead. Yeah, good afternoon. Congratulations, Gordon!

Michael: And we've got a healthy mix of investments in 2024 that will influence. Both so yes, that's factored into our guidance, but much of those investments are by design intended to pay out.

Michael: And more than a one quarter one year point of view.

Michael: Yeah.

Speaker Change: Got it thanks for taking my question.

Speaker Change: Again, if you have a question. Please press Star then one.

Michael: Our next question comes from John Lawrence with Benchmark. Please go ahead.

John Russell Lawrence: Yeah. Good afternoon, Congrats Gordon.

John Russell Lawrence: In quarter when you when you look at the when you look at the business and where you've come from with over the last couple of years all the.

Operator: When you look at the business and where you've come from over the last couple of years, all the... [inaudible] We've always talked about this, the base business, manufactured brands, and R&R. As you look forward, and this debt continues to come down, what does that capacity look like facility-wise as far as folding something else in or extensions, et cetera, to widen the portfolio? That's a good question, John.

John Russell Lawrence: Changes and better profitability, you've paid down the debt.

John Russell Lawrence: And as you as you look out a couple of years.

John Russell Lawrence: We've always talked about this a the base business.

John Russell Lawrence: Manufactured brands in the R&R is as you as you look forward and this debt continues to come down.

John Russell Lawrence: Does that capacity look like facility wise as far as holding something else and or <unk>.

John Russell Lawrence: Extensions et cetera to widen the portfolio.

Speaker Change: That's a good question, John and like we've talked about a lot and we've been very vocal about it we've.

McCord Christensen: And like we talked about a lot, we've been very vocal about it. We've been very disciplined as it relates to the acquisitions we've made and the value that we've paid for, and the upside that we saw in those acquisitions to go out and execute and create significant synergies value for us and our shareholders. We continue to look at lots of different assets out there that we think fit our criteria, that are our area of expertise, that we think we can do similar things with. And if they don't match, they don't fit, we move on.

Speaker Change: We've been very disciplined as it relates to the acquisitions, we've made and the value that we've paid.

Speaker Change: And the upside that we saw in those acquisitions to go out and execute and create significant synergy value for us and our shareholders.

John Russell Lawrence: We continue to look at lots of different assets out there that we think that our correct you would fit our criteria that.

John Russell Lawrence: Our area of expertise that we think we can do.

John Russell Lawrence: Similar things with and if they don't match they don't fit we move on and I think.

McCord Christensen: And I think whether it's, you know, two years from now and how we paid on debt or along the way, when you buy a Rocco and Roxy that you pay eight, eight and a half times for and, you know, you can add substantial new items, you can add substantial distribution, you can execute better, you can take costs out, those acquisitions become very affordable and frankly aren't something we need to consider you know what's going to happen in the future we can do those type of deals and so we're looking at those but you know PetIQ is a pet health and wellness company we're very focused on hitting the bullseye with the brands the products the deals that we do because it's where we can guarantee execution and we're going to continue to be disciplined at doing that I think in our you know three to five year plan we'd like to do another three to five deals similar to the Rocco and Roxy type deal but that's going to be dependent on our values and on the valuations and what we know we can execute again so I think we're going to continue to demonstrate responsible use of cash and responsible execution and the company can execute like we did this year without making acquisitions and continue to grow and do really well but we love when we find a Rock on Roxy type brand that we can go out and just do really fun great things with and make them into just a better platform with a more significant foundation to grow from so, I think that's kind of who we are in our culture. Great, thanks. Good luck. Our next question comes from Kaumil Gajrawala with Jeffreys. Please go ahead. The line may be muted for your questions. Sorry about that. On mute.

John Russell Lawrence: Whether it's two years from now and how we pay down debt or along the way when you buy a rockwood Roxy that you pay a eight and a half times four and you know you can add substantial new items you can add substantial distribution you can execute better you can take cost out.

John Russell Lawrence: Those acquisitions become very affordable and frankly arent something we need to consider you know what's going to happen in the future. We can do those type of deals and so we're looking at those but I do as a pet health and wellness company, we're very focused on hitting the bull's eye with the brands the products the deals that we do it because it's where we can guarantee X.

John Russell Lawrence: <unk>.

John Russell Lawrence: And we're going to continue to be disciplined about doing that I think are three to five year plan, we'd like to do another three to five deals similar to the Rockwood Roxy type deal, but that's going to be dependent on our values and on the valuations and what we know we can execute against so.

John Russell Lawrence: I think we're going to continue to demonstrate.

John Russell Lawrence: Responsible use of cash and responsible execution and the company can execute like we did this year without making you know.

John Russell Lawrence: Acquisitions and continue to grow and do re.

John Russell Lawrence: Well, but we love when we find the Rockland raunchy type brand that we can go out and just to really find great things with and make them into just a better platform with us more.

John Russell Lawrence: <unk> foundation to grow from so.

John Russell Lawrence: That's kind of who we are and our culture.

Speaker Change: Alright, Thanks, a good luck.

John Russell Lawrence: Our next question comes from Campbell.

Campbell: With Jefferies. Please go ahead.

Campbell: The line may be muted as for your question.

Campbell: Sorry about that on mute at some point I'll figure it out.

Kaumil S. Gajrawala: At some point, I'll figure it out. Yeah, I was following up on M&A and in terms of the environment. So you laid out your philosophy on approaching M&A. But given some of, you know, there's been some subsegments within PET that have weakened in recent months, has that changed what the, maybe the asking prices are for some of the things you're looking at? I don't know that we've looked at the macro market and how we've looked at M&A. We're very focused on the assets that make sense for us. We've had assets that don't make sense because they still are looking for multiples that we think are unrealistic and definitely don't fit our company, and we have other deals we've looked at that once we get into them, just the assets themselves are not as clean as they should be, and so I would say we're [inaudible] really out there pushing like you're thinking.

Campbell: Yes, I was following up on M&A and in terms of the environment. So you laid out your <unk> you.

Campbell: Our philosophy on approaching M&A, but.

Jefferies: Some of you know there's been some sub segments within pet that has.

John Russell Lawrence: Weakened in recent months has it changed what the maybe the asking prices are for some of the things Youre looking at.

Speaker Change: I don't know that we've looked at the macro market and how we looked at M&A. We're very focused on the assets that makes sense for us and.

Speaker Change: We've had at assets that.

Speaker Change: Don't make sense because they still are looking for multiples that we think are unrealistic and definitely don't fit our company and we have other deals we've looked at that once we get into them just the assets themselves are not as clean as they should be and so I would say were.

John Russell Lawrence: We're not.

John Russell Lawrence: Really you know out there pushing like Youre thinking, but let the macro environments given our categories. We've obviously demonstrated that pet health is really strong and growing there's a lot of anticipation that that's going to be a significant growth category for a long time, and we're positioned extremely well as it relates to pet health and wellness and retail.

McCord Christensen: But look, the macro environment is good in our categories. We've obviously demonstrated that pet health is really strong and growing. There's a lot of anticipation that this is going to be a significant growth category for a long time, and we're positioned extremely well as it relates to pet health and wellness and retail, with very little competition that's going to be available to do those deals. So that's where we are today, Kamal, and I wouldn't say that we're going to change that kind of environment. And it seems like we're looking at something all the time, but, You know, we pull the trigger and actually close very, very seldom.

John Russell Lawrence: With very little competition, that's going to be available to do those deals. So that's.

John Russell Lawrence: Where we are today Campbell and I wouldn't say that we're gonna change that kind.

John Russell Lawrence: Kind of environment and it seems like we're looking at something all the time, but.

John Russell Lawrence: You know, we pull the trigger and actually closed very very solid.

McCord Christensen: Great, thank you. This concludes our question and answer session. I would like to turn the conference back over to McCord Christensen for any closing remarks. Thank you, everybody, for joining us today. We really appreciate all your support. And obviously, thank you to the PetIQ team and all the hard work that went into delivering such an amazing 2023 and setting us up for an amazing 2024. We, as usual, are taking a conservative approach to the company's performance and outlook but are very excited about 2024 and beyond as PetIQ continues to gain momentum, further distance itself from its competition, and continues to execute at the level we execute.

Speaker Change: Great. Thank you.

Speaker Change: This concludes our question and answer session.

Speaker Change: I would like to turn the conference back over to cord Christensen for any closing remarks.

McCord Christensen: Thank you everybody for joining today, we really appreciate all your support obviously, thank you for attending Q team and all the hard work that went into delivering that's an amazing 2023, and setting us up for an amazing 'twenty 'twenty four.

McCord Christensen: As usual are taking a conservative approach to the company's performance and outlook, but are very excited about 'twenty 'twenty four and beyond as product continues to gain momentum.

McCord Christensen: Other distance itself from its competition and continues to execute at the level. We executed. So we look forward to reporting and talking to you again in a couple of months and look forward to interact with many of you over the next few days that I would like to have interaction with us and have questions. So thank you everyone take care.

McCord Christensen: So we look forward to reporting and talking to you again in a couple of months and look forward to interacting with any of you over the next few days that would like to have interaction with us and have questions. So thank you, everyone. Take care. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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