PetIQ, Inc. (NASDAQ:PETQ) Q1 2023 Earnings Call Transcript May 9, 2023

PetIQ, Inc. beats earnings expectations. Reported EPS is $0.45, expectations were $0.35.

Operator: Good day, and welcome to the PetIQ Inc. First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turner, Investor Relations. Please go ahead.

Katie Turner: Good afternoon. Thank you for joining us on PetIQ’s first quarter 2023 earnings conference call and webcast. On today’s call are Cord Christensen, Chairman and 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 actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Please note on today’s call management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s release for a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. In addition PetIQ has posted a supplemental presentation on its website for reference. And with that, I’d like to turn the call over to Cord Christensen.

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 Zvi will review our financial results for the quarter and outlook. Finally Zvi, 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. It has helped us achieve solid gross margin expansion and SG&A leverage resulting 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 strategic acquisition of Rocco and Roxie on January 13th for $26.5 million in cash.

As we discussed on our call last quarter, Rocco and Roxie 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. This acquisition also expands PetIQ’s offering into premium dog supplements and jerky treats. We believe we have a tremendous opportunity to grow Rocco and Roxie’s distribution beyond e-commerce to brick-and-mortar retail to accelerate growth of their existing business in 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 4.5% compared 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 PetIQ’s portfolio 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 channel for flea and tick it’s just a portion of the total category. As a result Nielsen data does not tell the complete story for the category results and now represents less than 25% of the market volume for the OTC flea and tick categories in which PetIQ competes.

We continue to believe PetIQ’s 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 products segment in more detail. As I mentioned our PetIQ manufactured products outperformed the broader category in Q1. The largest and most critical category to enabling our financial results is PetIQ’s manufactured flea and tick business. We saw its best quarter of winning over pet parents since our acquisition of Perrigo Animal Health in 2019. When looking at our OTC flea and tick brands growth in all sales channels for the 12 weeks ended March 25 2023, a few of the highlights from the quarter include: our portfolio of OTC flea and tick brands grew 6.3% versus the market’s growth of 4.1%, leading to a gain of 31 basis points of share.

Included in last year’s base for consumption, is a low-margin SKU within the dollar channel that we strategically chose to discontinue. If you move sales 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. Our pet supplement segment continues to see healthy consumption growth in the first quarter of 6.5%, as compared to the prior year period. This lower growth in our pet supplements business versus the total category was expected, and due to the planned transition of a significant PetIQ SKU, in brick-and-mortar during the first quarter of 2023. 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 PetIQ supplement brands would have been up over 12%, and better than the broader category consumption of 10.9% for the period ended March 25 2023. Importantly, we completed the SKU transition in Q1, and the early read across retailers is an acceleration in consumption. In addition, our dental treats brand Minties grew plus 22% and gain 36 basis points of share within the category. Dog treats increased 157%, driven by our Pur Luv brand and overall consumption across all of PetIQ branded offerings, and across all retail channels grew plus 10.4% for the 12 weeks ended March 25 2023. PetIQ manufactured products represented 26.2% of our Products segment, net sales in Q1 2023 compared to 28.4% in Q1 of 2022, pro forma for the acquisition of Rocco & Roxie.

This mix was slightly below our expectations for the quarter, as our distributed business had a more aggressive inventory build, with our top e-commerce partners late in the quarter. However, for 2023 we continue to expect to achieve our stated objective of having greater than 32% of Products segment net sales, from PetIQ 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 the 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 Product and Services segments to attract more pet parents to our 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 in the Products segment for Q2 to date, continues to show that PetIQ is performing well across all categories. That said, we are still early in the year and our team is consistently focused on the control aspects of our business, but we are being prudent in 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, for the 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 Zvi.

Zvi Glasman: Thank you, Cord. We’re pleased to achieve first quarter net sales and adjusted EBITDA ahead of our expectations. Today, I will discuss our quarterly financials in more detail, and our outlook for Q2 and the full year 2023. Q1 net sales were $290.5 million, an increase of 5.4% compared to Q1 last year driven by an increase in sales from both the Products and Services segments as well as the addition of Rocco & Roxie. First quarter 2023 gross profit increased 8% to $62.3 million, resulting in a 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 PetIQ manufactured brand launches in the prior year period in the Products segment.

SG&A expenses for the first quarter of 2023 were $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 $0.32 the highest in the company’s history. Adjusted net income for the first quarter of 2023 increased 40.6% to $14.2 million and EPS was $0.45. 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 to $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 and liquidity for the first quarter ended March 31 2023 the company had total cash and cash equivalents of $25.4 million. Net cash used in operating activities were $43.3 million for the first quarter ended March 31 2023 compared to $45.4 million used in the 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 our acquisition of Rocco and Roxie. In addition to our cash on hand the company’s revolving credit limit is undrawn and has $125 million of availability, together representing total liquidity which we define as cash on hand plus availability of $150.4 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 terms of our credit facilities at the end of the first quarter 2023 was 4.5x 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 in the first quarter for its acquisition of Rocco and 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 Products 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 and as slow noted in today earnings and finnawe are reiterating our guidance that the company previously provided on February 28 2023 and as also noted in today’s earnings release and financial presentation available on our website.

For 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. For the 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’s 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?

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

Operator: Thanks Rupesh. The next question comes from Jon Andersen with William Blair. Please go ahead.

Operator: [Operator Instructions] The next question comes from Bill Chappell with Truist Securities. Please go ahead.

Operator: The next question comes from Corey Grady with Jefferies. Please go ahead.

Operator: [Operator Instructions] And we have a follow-up from Jon Andersen with William Blair. Please go ahead.

Operator: And we have a question from John Lawrence with Benchmark. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Cord Christensen for any closing remarks.

Cord Christensen: Again, just thank you for joining us today. We’re extremely pleased with our ability to deliver sales and adjusted EBITDA above the guidance that we provided and we’re very happy with the execution we received from all of our employees across the company to do that and our retail partners and partnerships that have continued to be loyal and help us take our mission forward 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 in 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 quarter. So, thanks for joining us everybody. We’ll talk to you soon.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.