PetIQ, Inc. (NASDAQ:PETQ) Q2 2023 Earnings Call Transcript

PetIQ, Inc. (NASDAQ:PETQ) Q2 2023 Earnings Call Transcript August 8, 2023

PetIQ, Inc. beats earnings expectations. Reported EPS is $0.46, expectations were $0.26.

Operator: Good day and welcome to the PetIQ Inc. Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [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 second quarter 2023 earnings conference call and webcast. For today’s prepared remarks, we’ll hear from 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 record second quarter financial results. I’ll begin with an overview of key highlights since Zvi will review our financial results for the quarter and outlook. Finally, Zvi, Michael, John and I will be available to answer your questions. Our team did an excellent job during the second quarter, executing our operational and strategic growth initiatives, their hard work and dedication across both our products and services segment enabled us to report record net sales and adjusted EBITDA, both of which exceed our expectations for the second quarter of 2023. And as a result of our better-than-expected Q2 and year-to-date results, we are pleased to be able to raise our full year 2023 outlook.

A few key highlights from the second quarter include: we reported net sales of $314.5 million, an increase of approximately 25%. The net sales result was above our second quarter outlook of $270 million to $280 million. We had strong broad-based growth across our business with a solid increase in gross profit dollars and improved leverage of our SG&A expenses even with the key investments in advertising and promotional spend to support the growth of our business. This helped us achieve record quarterly adjusted EBITDA of $32.9 million, ahead of our guidance for the second quarter, adjusted EBITDA of $24 million to $26 million and a 36% increase versus second quarter of 2022. Our higher earnings and improved working capital helped us achieve second quarter record cash from operations, and we reduced the company’s net leverage to 3.6 times as of June 30th, 2023.

Turning to our products segment in more detail. The products segment contributed net sales of $278.2 million, an increase of 27% compared to the prior year period. 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 36 months during the second quarter of 2023 at a positive 10.4%. In second quarter of this year, nearly 50% of the over-the-counter flea and tick category sales were generated online. And importantly, PetIQ’s portfolio of brands continue to capture a disproportionate amount of this growth and dramatically outperform the broader category as evidenced by our second quarter share results. Turning to our products segment in more detail.

As I mentioned, our PetIQ manufactured products outperformed the broader category. The most critical category to enable our financial results is PetIQ’s manufactured flea and tick business, which saw its best quarter of winning over pet parents since our acquisition of Perrigo Animal Health in 2019. When looking at our over-the-counter flea and tick brands, growth in all sales channels for the 12 weeks ended June 17th, 2023, our portfolio of OTC flea and tick brands grew a positive 15.3% versus the market’s growth of a positive 10.4%, leading to a gain of a positive 46 basis points of share. These gains were driven by both our PetArmor Plus and Capstar brands. Our pet supplement segment saw accelerated consumption growth in the second quarter of 2023 as our portfolio grew a positive 19.5% as compared to the prior year.

The category also continues to see significant expansion in the quarter, gained 16.1% over the prior year period. This fast-growing category has more than doubled over the last four years and has surpassed the OTC flea and tick business as the largest category we compete in within our manufactured portfolio. Strong household penetration trends along with expanded need states in the category gives us confidence that the broader category will continue to maintain high double-digit growth rates for many years to come, and PetIQ is positioned very well to continue to gain share in this important category. In addition, our dog treat business continued to also outperform the category. This growth was led by our dental treat business via the Minties brand, which grew positive 31% and gained 47 basis points of share within the category.

Another growth driver for us in the quarter was our PETLOVE treats brand, which expanded by a positive 23%. The newest member of our portfolio, Rocco & Roxie, which we acquired in January of 2023 also saw double-digit growth rates. The Rocco & Roxie brands grew a positive 13.8% in the second quarter, well ahead of our projections. We exited several parts of the business in the first half of 2023 that we determined were not a strategic fit for us and are pleased to still have recovered these lost sales and achieved better-than-expected growth without their sales contribution. Our core items in the premium pet stain and odor category exceeded our expectations, and we are very encouraged to see the brand begin to expand into other premium pet categories with success.

This has also contributed to the share gains we are seeing within the brand. Sales of the PetIQ manufactured products increased 21.2% ahead of our expectations. Our own manufactured products represented 29.1% of our products segment net sales in Q2 of 2023 compared to 26.2% in Q1 of 2023. This build-in run rate will continue in the back half of the year and will allow our manufactured products to achieve our sales dollar growth for 2023. However, we will likely be below our expectations of 32% of our products segment sales to come from the PetIQ manufactured brands in 2023 as our distributed product portfolio has significantly recovered from the prior year and is contributing above our model forecasts. That said, we do continue to expect outperformance of our PetIQ manufactured product portfolio, but this will be against a larger pie of overall revenue than we previously forecasted.

Now, focusing on the services segment. Our services segment reported second quarter 2023 net revenue of $36.4 million, an increase of 10.2% as compared to the prior year period and ahead of our expectations. We experienced improved cancellation rates and solid operational improvements, which allowed for increases in average revenue per clinic and average dollar per pet served during the second quarter of 2023. We converted four wellness centers to hygiene centers in the quarter, and we will continue to test this exciting new addition to the services segment. Moving forward, we will remain prudent with our new location growth for the remainder of 2023. Importantly, under John Pearson’s leadership, the services segment has experienced a significant improvement in the last year since he has joined.

Most recently, our services team executed regional pricing and has tested additional services centered around hygiene, with select locations already successfully increasing the number of pet visits as a result of these new services. During the second quarter, we also launched a new convenient virtual tool allowing pet parents to book appointments easily or walk in and know when they can see a vet or vet tech. We’ve been pleased with the innovation and pace of results generated from the services segment since second quarter last year and look forward to the opportunities we have ahead. Before I turn the call to Zvi, I would like to congratulate John Pearson on his promotion to Executive Vice President, Services and Manufactured Products, a newly created role effective August 2nd, 2023.

In his new role, John will gain responsibility for PetIQ’s manufactured product portfolio, inclusive of the company’s sales and marketing teams, while maintaining its current responsibilities for the Services segment. He will continue to report directly to Michael Smith, President and Chief Operating Officer. On behalf of the Board and our leadership team, we are thrilled for John to step into this new role as we continue to build upon our strong foundation for growth and profitability and deliver a smarter way for pet parents to help their pets live their best lives. We remain optimistic about our opportunities for growth in the second half of 2023. And our data across all sales channels in the Products segment for Q3 to-date continues to show that PetIQ is performing well across categories.

In closing, we appreciate the hard work and dedication of our employees in our manufacturing and distribution facilities as well as our corporate office, for their commitment to our mission and core values in helping us to achieve these operational and financial results. With that overview, I would like to now turn the call over to Zvi.

Zvi Glasman: Thank you, Cord. We are very pleased with our second quarter results and ability to raise our 2023 annual guidance based on our strong year-to-date financial results. Today, I will discuss our quarterly financials in more detail and our outlook for Q3 and the full year 2023. We reported record Q2 net sales of $314.5 million, an increase of approximately 25% compared to Q2 of last year, driven by an increase in sales from both the products and segment segments as well as the addition of Rocco & Roxie. As Cord mentioned, we had strong broad-based growth across all sales channels and product categories. Second quarter 2023 gross profit dollars increased 19.2% to $73.9 million, a shift within the mix of products segment sales through more health and wellness products that carry a lower margin and timing of cost increases contributed to the 23.5% gross margin in the second quarter of 2023, representing a 110 basis point decline as compared to Q2 of last year.

SG&A expenses for the second quarter of 2023 were $55.2 million compared to $50.6 million in the second quarter of the prior year. SG&A as a percentage of net sales decreased 250 basis points to 17.5%. Adjusted SG&A was $51.5 million for Q2 of 2023 compared to $46.1 million in Q2 of last year. As a percentage of net sales, adjusted SG&A was 16.4%, a decrease of 190 basis points compared to the prior year period. The decrease was mainly due to continued leverage of costs and increased business expense efficiencies relative to the growth in sales for the quarter. It is worth noting that we leveraged SG&A in the quarter while also growing our A&P investments to support the long-term health of our manufactured brands portfolios. From a profit perspective, we reported Q2 net income of $9.6 million or EPS of $0.32.

Adjusted net income for the second quarter of 2023 was $13.4 million and adjusted EPS was $0.46, an increase of 39.4% compared with Q2 of last year. Q2 EBITDA was $29.2 million, an increase of 49.2% compared to $19.6 million in the prior year period. We reported record second quarter adjusted EBITDA of $32.9 million, an increase of 36.3% compared to $24.1 million in Q2 last year, representing an adjusted EBITDA margin of 10.4%, an increase of 80 basis points compared to Q2 of 2022. Turning to our balance sheet and liquidity for the quarter ended June 30th, 2023, the company had total cash and cash equivalents of $78.4 million. The company generated $57.7 million of cash from operations for the second quarter of 2023. This was driven by increased earnings as well as $34.2 million from working capital benefits as a result of the seasonal nature of the business.

We’ve been pleased with the company’s cash generation in the first half of this year and now believe we will be towards the top end of our annual free cash flow guidance range of $30 million to $40 million. The company’s total debt, which is comprised of its term loan, ABL, convertible debt, and capital leases was $449.6 million as of June 30th, 2023. In addition to our cash on hand, the company’s revolving credit limit is undrawn and has $125 million of availability. Total liquidity, which we define as cash on hand plus debt availability was $203.4 million as of June 30th, 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 second quarter of 2023 was 3.6 times versus 5.0 times in the prior year period, driven by higher earnings and improved working capital.

We are pleased with our ability to reduce our leverage and continue to believe net leverage at the end of 2023 will be lower than at the end of 2022. Our team remains confident that the consistent growth and contribution from the products segment as well as the ongoing improvement in the services segment positions the company well to drive future free cash flow and build cash in addition to opportunistically paying down our debt. Now, turning to our guidance. For the year ended December 31st, 2023, we are raising the guidance. Note, I will reference the midpoint of the guidance ranges when discussing our percentage increases in net sales and adjusted EBITDA as compared to the prior year period when compared to Q3 of 2022. This is consistent with what is presented in today’s press release and earnings presentation.

We now expect net sales of $1.10 billion to $1.050 billion, an increase of approximately 12% as compared to 2022. For adjusted EBITDA, we increased the range to $93 million to $97 million, representing an increase of approximately 22% as compared to 2022. For the third quarter of 2023, we expect net sales of $220 million to $240 million, an increase of approximately 10% as compared to the prior year period. And we expect adjusted EBITDA of $18 million to $20 million, an increase of approximately 17% as compared to the prior year. Based on the success of our marketing initiatives year-to-date, our raised outlook for the remainder of the year now includes an incremental $2 million of A&P investments to benefit brand awareness and consumption in 2024 and beyond.

Keep in mind that consistent with prior year periods, the fourth quarter of 2023 will be the lowest contribution net sales and adjusted EBITDA quarter. In addition, it is important to note that in Q4 of this year, we expect to make certain strategic growth investments in SG&A to support the continued growth and development of our brands and position us well for the start of next year. So, based on these items, you will see an implied lower growth rate in Q4 of this year versus the year-over-year growth expectations we have communicated today for the third quarter of 2023. In closing, we reported strong results for the second quarter and first 6 months of 2023, and our team remains optimistic about our opportunities for growth in 2023. At PetIQ, our team will continue to execute on the strategic initiatives to deliver value for all of our stakeholders as we execute on our mission of smarter, convenient and affordable health and wellness for pet parents.

That concludes my financial review. Cord, Michael, John, and I are now 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.

Rupesh Parikh: Good afternoon and thanks for taking my question and congrats on a very strong quarter. So, I just wanted to start out with your Q2 performance. So obviously, a very strong topline, be it looks like you beat the high end by more than $30 million. Just curious if you can rank the sources of upside versus, I guess, your guidance range? Thanks.

Cord Christensen: Thanks for the question. Probably better Michael answer this, because he can talk through which categories outperformed. We just — we saw overall consumption trends accelerate in second quarter from first quarter, which was also a very strong quarter. But Michael, why don’t you comment on the sources of the beat?

Michael Smith: Yes, Rupesh, I would say it was a very broad beat. If you look at kind of our key categories, there’s not necessarily one that massively outperformed to lead the pack per se. They all carried a little bit of weight. Obviously, the overperformance in the flea and tick category helps not only on the topline, but also on the bottom-line. We had a significant beat there versus our expectations, not only for the category, but also the amount of share that we were able to pick up in the second quarter. We also had really strong results out of our supplements business, our dental treats business. We saw better-than-expected results from our stain and odor business under the acquisition of Rocco & Roxie and then our distributed portfolio overperformed expectations as well. So, really, each of the key segments of business had meaningful beats versus our expectations.

Rupesh Parikh: Great. And then looking at Q3 guidance, it does imply a moderation on the sales line versus Q2. And I know there — seasonality and comparisons come into play, but just curious if there’s maybe more conservatism for Q3 or if there’s something else at play?

Cord Christensen: I think in general, I mean, Rupesh, we always know that Q3 and Q4, we start to see less contribution from our seasonal businesses. And so we’ve definitely been conservative to kind of anticipate what’s happening. If we continue to see consumption running the way it is, then we anticipate that we’ll also have a stronger Q3 than what we’ve guided to. But it’s responsible based on what we know from historical performance on just the overall season out of the business. And so we’ve taken in account, if you look at Q3, Q4, same commentary, we know in Q4, we get less contribution from the categories that flea and tick and some of the others that are overperforming right now. And so in general, we’ve been conservative — but we’re also, again, just in a great place, consumption is good.

Pet parents have decided to take care of their pets or spending in the right areas. We’ve seen a recovery in the super premium as well. And so just in general, we’re just making sure that we are not overreading in the seasonal contribution as it starts to kind of taper off, we also have to take into account what happens with weather as Q3 and Q4, we don’t know when the season starts to drop off. And so, that’s also us being concerned about what could potentially happen there. So, if everything goes right, we could see and outperform. But right now, I think it’s the right thing to do based on what we’ve done with our guidance.

Rupesh Parikh: Great. And then my last question, just on gross margins. So, mix shift did weigh on your gross margin rate during the quarter. Just curious how you’re thinking about the gross margin puts and takes for the back half of the year in specialty mix?

Zvi Glasman: Yes, this is Zvi. The main thing that drove our gross margin down in the quarter was the fact that our manufactured categories performed exceptionally, but a lot of the manufacturing categories that grew faster than — grew faster with the health and wellness categories, those categories carry a slightly lower but very healthy margin. And so that drove the margin percentage down in the quarter. We continue to expect — it’s also worth pointing out that Q2 is a bit of an anomaly. The rest of the year, we do expect to be up on a year-on-year basis for margins close to 100 bps, probably 75 to 100 bps. So, I think we have pretty good line of sight to margins. The only way the margin percentage will be down is if some of those other categories outperform, but that would only happen probably with upside to the total margin dollars.

Rupesh Parikh: Great. Thank you. Congrats again.

Cord Christensen: Thanks Rupesh.

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

Jon Andersen: Hi, thank you for the questions. I wanted to ask about the services business. I think, Cord, you mentioned four conversions of wellness centers to hygiene locations. Can you talk a little bit more about what’s going on there, what your plans are for the future? What kind of performance you’re seeing as you shift towards kind of the hygiene approach and how that might play out over the next 12 to 24 months?

Cord Christensen: Thanks. I think in general, we’ve talked about a lot, obviously — conference. The hygiene addition is significant for us. We’re testing it. We’re measuring it. We’re definitely not declaring victory yet, but we’re very encouraged by what it adds to the location because it’s a list of services that drive great revenue and margin profile without beating the bad labor. We’re able to really focus on what we’re great at, which is our ability to move that’s there when we need the vet present. We’re up to six locations. We’re definitely going through an optimization with those. We’re testing. We’re growing the subscription base there. We’re learning. But at the end of the day, it’s still early in our decision to expand it significantly.

But all indications is it’s a great opportunity for us. We think it’s the right thing for the business. We need to add more revenue and margin opportunities for the box. And so we’re excited about it. But again, I think in general, we’ve always said we’re going to get enough of a base to really test measure. And once we declare victory, we’ll let people know. But again, I think in general, we think it’s the right thing for what’s going on in the layer market with the vets. We think it’s the right thing for PetIQ and we’re excited that we’re kind of at a place where we have a broader base group of stores across a bunch of different demographics to start testing and measuring and growing across that thing. So, we’ll be giving you updates every quarter on how we’re doing when we declare victory, we’ll let you know.

But we’re still early in the process, but again, very optimistic and encouraged by what we’re seeing.

Jon Andersen: And a follow-up on that. Are you doing the hygiene centers with one particular customer? Is this something that the customers requested? Is it across formats? And then second to that, is there anything broader that you’re considering doing with the kind of the service center model, a different kind of approach overall with any customers longer term?

Cord Christensen: Yes, I think first and foremost, our community clinic model, which we’ve had forever, is doing extremely well. We’re expanding the number of events. We’re holding with that. We see growth there that’s significant margin profile, EBITDA margins, contribution is significant. From a hygiene perspective, we’ll do it anywhere it makes sense to do it. So, all customers and all wellness centers are on the tables and option to deal with it. But again, I think we’re encouraged what we’re seeing. It adds a lot to the box. It’s a service that people need monthly. And so a pet needs to be there 12 times a year versus 1.2 times on a vet service, I think it’s not much difference on a monthly basis, so it’s not hard to figure out that, when it works, it’s really a great contribution.

And right now, no, we’ve kind of put all the research in, all the deals in saying that we’re testing, measuring and working towards how that would potentially contribute. And it’s also part of all the general health care thing we’re committed to, which is these hygiene services help the pet, helps their health care, helps things work. And so we’re just continuing to kind of head down the path. But again, it’s early and we’re not really declared victory yet, but we’re definitely encouraged.

Jon Andersen: Just one more, two-parter costs. I think Zvi mentioned part of the lower gross margin rate in the quarter was a mix shift. I think that was the bigger part, but also mentioned timing of cost increases, just was hoping to get a little bit more explanation around that and whether those are transitory or there’s something else? And then on the additional A&P investment and additional investment in the fourth quarter, what — how will that be directed to kind of, I guess, what part of the business do you see the opportunity to invest more behind as you look to longer-term growth?

Zvi Glasman: Yes. Let me take that. So, in terms of the cost, there is no impact this year. Last year, with a pretty dynamic pricing environment where costs were going up. There were times where we had things we paid for that were at a lower cost before a price increase, but we sold them at a price increase. We obviously try to buy commodities and things like that in that way as well. So, there is no impact this year, just — there was a little bit of benefit last year. In terms of the marketing, Michael can provide the details, but it’s invested in the manufactured part of our business. And I don’t know if Michael has any more detail to add to that.

Michael Smith: Yes, I would just say that really, it’s not against one single brand or initiative, it’s really a reinvestment into more awareness tactics to build the long-term health of our portfolio. We obviously invest a variety of different tactics for a variety of different outcomes, but the incremental investment that we’re putting into the business in the back half. We do hope to have some near-term benefit, but is designed to be more of a long-term benefit to the brands over the next 12 to 24 months.

Jon Andersen: Great. Thanks and congrats on a nice quarter.

Cord Christensen: Thanks Jon.

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

Bill Chappell: Thanks. Good afternoon. Just a follow-up on just the overall flea and tick season. I mean, it seemed from the other seasonal stocks we cover, it was a slower start in terms of cooler weather start to the spring and then I guess, heated up, but I don’t know how that compares to what you’re expecting, how it compares versus year-over-year, if some of this is a benefit of a stronger-than-expected season or just really an outperformance from the company?

Cord Christensen: Michael, do you want to go first? I’ll kind of clean up after.

Michael Smith: Yes. On flea and tick, look, it’s a category that is largely going to be tied to weather-driven demand dynamics and we are seeing conditions this year that are more favorable than the average year and definitely more favorable than last year and more favorable than we had modeled and expected. So, as a category, we expected to see low to mid-single digit growth. We’re seeing high-single digit to low-double digit growth for the category. And then we’re gaining share on top of that and outperforming the category between 300 and 400 basis points depending upon what time frame you look at. So, I would say, a, we are outperforming, and there’s elements of our strategy that are translating to the results that we posted. But to be candid, we are also seeing a growth in the pie that we did not expect, but is also leading to kind of the double positive of the over-deliverance in that portion of our portfolio.

Cord Christensen: The only thing I’d add, Bill, is I’d also think that we expect the consumers still to be very conservative. We’ve definitely seen a consumer that’s adjusted their budgets to take care of their pets. They’re spending again, the high end with what we distribute is definitely performing better than we expected, which is also says that the consumers have finally kind of bottomed out whatever was happening with the economy, with the expectations of what was going to happen and they’ve returned to spending on their pets. And so that part’s overperformed. Our categories are definitely overperformed. We did some things, marketing and positioning that definitely have worked to our benefit. And it’s why Michael and his team has been able to take more share than what we expected.

So, in general, it’s a good category for weather, but it’s hard to measure with all the other noise that happened with the consumer. And so I think we’re — like we’ve always said, we’re radio business every day. We’re positioned to win. And this is a year that it’s definitely kind of all come together better than we expected.

Bill Chappell: Got it. And I guess on that same vein, how much do you think of this is instead of one or two good quarters, I mean, a, kind of a longer term post-pandemic dividend of a higher pet population and more consumers spending on their pets and new pets they’ve gotten over the past three, four years?

Cord Christensen: I definitely think that for the first time, we have kind of a normalized year where we’re not trying to deal with anomalies in the market and who’s doing what and why and how. And so that’s been nice to have that kind of level turns and just consumption and basic stuff. But look, weather has been good this year for our categories. The consumer is responding well. We’re definitely at a place as a company where we know how to reach out, communicate, educate and convert people to do things. We are making investments to continue that because we’re able to measure that ROI and understand how it pays dividends. And I think, in general, we’re positioned extremely well as a company, whether it’s flea and tick or health and wellness or its dental or it’s the stuff we distributed, so it’s all working well because we’re finally in a place where we’re not trying to take apologize for some that’s going on outside of the company’s control.

And so when we’re in control, we have the levers we’re pulling them they’re working. And I think you’ll see a great back half of the year and a great 2024.

Bill Chappell: Got it. And I’ll sneak in one follow-up. Yes, sure.

Michael Smith: I was just going to add and touch more on to that. I don’t want us to not get credit for some of the things that our team has done, because weather is a huge factor, but look, there’s some real changes in consumer behavior and retailer behavior around this category that is worth noting. One, animal health and an OTC environment with our retail partners continues to be a higher point of emphasis as they seek to win over customers in a bolder way. Animal health and pet continue to rise to be something that is getting more attention and focus and support, which is a contributor to the performance we’re seeing. But we’re also seeing some shifts in consumer behavior where last year, we started seeing consumers not preventively treat their pet.

They were waiting to see an issue on the pet and then they would treat. We’re seeing a reversion back to the preventative mindset and greater compliance of dosing every month and a reversion back to the bigger pack sizes that tell us that compliance is being driven. As the product is in the home, it gets utilized when the smaller pack size is purchased, you can miss a month of dosing. And there’s a lot of good organic tailwinds and seeing those consumer trends come back to support the category longer term that do look now to be sticking. And over a two-year, three-year period, we have seen that, Q2 and Q3 of 2022 were an anomaly, and it looks like we’ve, of course, corrected back to the way the consumer traditionally engages in this category.

Bill Chappell: Thanks so much for the color. Appreciate it.

Operator: The next question comes from John Lawrence with Benchmark. Please go ahead.

John Lawrence: Good afternoon guys. Congrats on the quarter. Yes, John, congrats on your promotion. Could you just give a little insight as to the last year and talk about when you came into the role on the services side, talk about some of the heavy lifting and some of the things that you put in place on that services business to generate these kind of results?

John Pearson: Thanks John. So, yes, when joined the team just over a year ago, for me, it really goes back to the customer and what is our customer value and want most from us, and when we look at our business model, it’s all about convenient access to affordable care on the services side. And we — I assessed where we were putting dollars to improve our business model, it was frankly towards other customer value propositions that our customer hasn’t. And frankly, we haven’t proven our leaning towards us for — and so it’s really an assessment of where do we need to put resources to focus on the things that matter most to our customer. And so we focused on improving our cancellations, getting our staffing right, finding the appropriate bets in markets where we generate the best return.

And then as we’ve been on this journey with the wellness center reimagination, it’s really assessing what matters to that customer as well. And is it similar to the community clinic model or different and we’re excited about now the capabilities that the team has enabled through tech enablement and several other factors to be able to have more levers to deliver the P&L and deliver what the customer cares about, which, as I mentioned, is affordable accessible care.

John Lawrence: Great. Thanks. And Cord, would you talk about the product portfolio? I know you’ve got some changes coming in 2024, speak to that. And obviously, the offerings will get broader and remind us what that looks like as we — as you continue to grow that category?

Cord Christensen: Well, I think in general, we have both our distributed portfolio has some significant launches as they’ve made it through both the FDA and the EPA that we think will add significant value to the portfolio. We’ve been working against a very robust R&D portfolio that we have launches that will happen in 2024, 2025 that we are excited about that we’re very, very optimistic about our continued ability to grow, deliver value and make things work. And then I think as you’ve seen, we’re hitting our stride as it relates to our current portfolio, PetArmor, Capstar, Minties, VetIQ, all those brands are exceeding our expectations from a growth standpoint. I think you’ll find as you track the performance in our manufactured brands with the margin profile of it.

We have a great base with great growth and now one of the best times we’re going into with our R&D portfolio starting to come through all the regulatory process to be able to deliver. So, we’re optimistic about the future. It’s never a straight line up to the right, but it’s always going to be up to the right with PetIQ. And so we’ll continue just to work hard and deliver those type of results. And this is the quarter we’re excited about is we’ve been able to leverage all aspects of the business, services, manufactured, distributed. Everything has done a really good job as we’ve seen pet parents get excited about getting back and just taking care of the pets, and I think it’s indicative of where people prioritize where they are going to take care of the things in our personal life.

So, we’re — we’ve got a great quarter. We’ve got a great year-to-date. Obviously, we raised guidance significantly for the rest of the year. And I think we’re also still being conservative for the back half. So, yes, it’s been a great quarter, John.

John Lawrence: Thanks. Good luck.

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: I just like to thank everyone that’s been on the call and with us through the last few years, it’s been great to finally be at a place where we’re able to operate in an environment where the consumer, the market, there’s not a lot of different anomalies. The retailers aren’t having inventory issues. And I think you can see how the company can perform when we can have a stabilized market. So, it’s been a great year. Our employees have done an amazing job across all aspects of the business. We appreciate everyone that’s with us and talked with us and been here for us as we continue to grow as we’ve continued through thick and thin to deliver great results, but 2023 has been a great year for the company, a great year for pet parents and definitely a great year for PetIQ to continue to offer value and convenience for all pet parents across the country. So, thanks for being with us, and we look forward to spending time with you.

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