PetIQ Inc. (NASDAQ: PETQ) Q1 2020 Earnings Call Transcript

PetIQ, Inc. (PETQ) Q1 2020 earnings call dated May 08, 2020

Corporate Participants:

Jeff Sonnek — Investor Relations , Senior Vice President

McCord Christensen — Chief Executive Officer and Chairman of the Board

Susan Sholtis — President

John Newland — Chief Financial Officer & Corporate Secretary

Analysts:

Bill Chappell — SunTrust — Analyst

David Westenberg — Guggenheim — Analyst

Joe Altobello — Raymond James — Analyst

Jon Andersen — William Blair — Analyst

Kevin Grundy — Jefferies — Analyst

Brian Nagel — Oppenheimer — Analyst

Presentation:

Operator

Good day, and welcome to the PetIQ First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Jeff Sonnek, ICR. Please go ahead.

Jeff Sonnek — Investor Relations , Senior Vice President

Good afternoon, and thank you for joining us on PetIQ’s First Quarter 2020 Earnings Conference Call. On today’s call are Cord Christensen, Chairman and Chief Executive Officer; Susan Sholtis, President; and John Newland, 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 and 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 SEC and the company’s press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note on today’s call, management will refer to certain non-GAAP financial measures, including adjusted gross profit, adjusted net income and adjusted EBITDA, among others. 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.

Today, management is conducting the call from their respective remote locations. As such, there may be brief delays, cross talk or other minor technical issues during the call. We thank you in advance for your patience and understanding.

Now I’d like to turn the call over to Cord Christensen. Cord?

McCord Christensen — Chief Executive Officer and Chairman of the Board

Thank you, Jeff.

Good afternoon, everyone. We appreciate you joining us today to discuss our strong first quarter financial results. Susan will provide detail on our Service segment, and John will discuss our first quarter financial results in more detail. Finally, Susan, John and I will be available to answer your questions. Before I get into our robust sales growth, strength of our diversified pet health and wellness business model and adjusted EBITDA improvement, I’d like to comment on the COVID-19 global health crisis and what we are experiencing across our operations.

First and foremost, our thoughts and prayers go out to all of those affected by the virus. Our leadership team had crisis plans in place ahead of time and have rapidly improved those plans for this situation. And I am proud to say we took decisive actions and executed well. As the situation has continued to rapidly evolve, our number one priority has been to prioritize the health and safety of our veterinarians, associates, pet parents and retail partners. As you’d expect, we’ve instituted a virtual work-from-home environment for our corporate staff and other employees that aren’t critical to fulfilling customer orders and deliveries at our manufacturing and distribution facilities.

We are fortunate that all our facilities have been deemed essential businesses. This is a privilege and a responsibility we do not take lightly as we serve our valued pet parents, retail and online partners, providing them with safe and convenient access to affordable pet health care. We implemented heightened safety measures in our facilities to protect against and prevent the spread of COVID-19. These include, but are not limited to, staggering work schedules, redesigning work facilities to ensure appropriate social distancing and significantly enhancing sanitation and regular cleaning procedures. We are immensely grateful to our employees, particularly those on the front line working in our facilities, and have proactively taken actions to reinforce our appreciation and commitment to them. In our veterinarian services segment, we were experiencing double-digit growth in pet counts, average ticket and overall sales for the month of January and February. Due to COVID-19, we started to see a reduction in traffic and started to close wellness centers and clinics on March 14. And on March 20, we temporarily closed all wellness centers and clinics, as we previously disclosed. This decision was not easy, but we believe it was the right one.

The estimated first quarter impact to the Services segment from these closures was in excess of $5 million of revenue in excess of 1,200 basis points of segment gross margin and approximately $3.2 million to consolidated adjusted EBITDA. We anticipate the immediate impact to our Services segment cost structure was more significant in the month of March following the closure of the services operations than it will be in the month during the second quarter due to the reduction in variable costs following the closures. During this time of uncertainty, we are pleased to be in a position to continue to support our employees and their families financially. Since suspending our service operations, we have been paying our impacted employees 2/3 of their wages. Susan has been leading the services team and planning for the new normal as a result of the COVID-19, and we are fortunate to be able to begin reopening certain wellness centers and clinics as of tomorrow, Friday, May 8. We remain optimistic about our reopening all of our service locations in the coming weeks and months.

Now shifting to our quarterly financial highlights. I’m extremely proud of our entire team and how they’ve come together in a challenging operating environment to exceed our expectations for the first quarter. We generated record net sales of $187 million, an increase of approximately 26%; and achieved adjusted EBITDA of $14.5 million, an increase of 33%, demonstrating the leverage of our diversified business model even with COVID-19-related sales and cost impacts. While we do not benefit from Service segment sales and profit contribution during the temporary closures, we remain in a healthy financial position. While we have seen increases in inventory and receivables based on strong peak seasonal demand, we continue to have ample liquidity and financial flexibility with our cash on hand, cash generation and existing availability under our revolving credit facility. Near term, our team has also put in place a very conservative capex program to ensure in this operating environment that we are still able to achieve our cash flow goals.

Taking a closer look at our Products segment. For the first quarter, we experienced a record 32% increase in sales led by our e-commerce business that was up significantly versus Q1 of last year. Our pet prescription business was the most meaningful contributor to this increase as pet parents use this sales channel to access safe and affordable health care items for their pets. Importantly, we saw all our retail partners benefit from the channel shift away from the traditional veterinarian offices. Even with these surges in volume, our distribution and manufacturing facilities still have greater than 40% excess capacity with lots of room for future growth. Keep in mind, we outperformed our expectations in Q1, with both January and February in line to ahead of our plan on a consolidated basis, along with a strong acceleration in our Products segment in March. This acceleration allowed us to overcome the negative impact created by COVID-19 on our Services segment.

Our Products segment continues to be fully operational and is generating an even greater acceleration in sales during the second quarter. Our Service segment remains closed, but with a reduced monthly impact due to managing our variable cost structure. However, we are not able to estimate the full financial impact of the COVID-19 pandemic with reasonable accuracy on our Services segment, particularly on the timing of the reopening of all our wellness centers and clinics. As a result, we are suspending our annual 2020 outlook. To give you a little more perspective on the health and stability of our consolidated operations in the second quarter, we believe we will see a similar result as first quarter, where the acceleration in product sales will significantly reduce any financial impact from our closed Services segment. We believe our financial results also demonstrate the strength of the pet health and wellness industry and our ability to weather any changes in the broader macro economy with success.

Dating back to the most recent financial downturn in 2008 to 2009, the pet industry outperformed the broader consumer discretionary markets. And based on some of the anecdotal trends we are seeing emerge today, such as the acceleration in pet adoptions from shelters, rapid engagement from pet parents across e-commerce and acceptance of retail fulfillment of pet prescriptions, we believe that the major secular trends, like humanization of pets, continues to build momentum, representing a continued strong tailwind for PetIQ. Over the last few years, we have made strategic acquisitions to further diversify our business across product and service offerings as well as sales channels. Our business transformation has made PetIQ significantly more insulated, which is particularly evident during times like we find ourselves in today. In summary, PetIQ’s mission of delivering smarter options for pet parents to help enrich their pets’ lives through convenience and affordable access to veterinarian products and services is working. Our growth and results demonstrate how well our complementary and diversified model is resonating with pet parents.

At PetIQ, we remain uniquely positioned in the animal health industry with our vertically integrated product manufacturing and distribution platform and an unmatched national footprint with convenient access to veterinarian services, prescriptions and OTC medications at a value. We believe we are well positioned long-term to achieve our strategic and financial objectives and look forward to enhancing value for our shareholders.

With that overview, I would like to turn the call now over to Susan.

Susan Sholtis — President

Thank you, Cord.

I’ll provide some additional detail around the impacts to our services organization following the onset of the COVID-19 pandemic. As Cord mentioned, our services organization got off to a strong start in the first quarter. We were rapidly executing our wellness center growth initiative, completing 27 new build-outs. We were seeing tremendous improvement in key metrics, such as pets per clinic and average ticket, and our overall revenue growth rate was up double-digit versus prior year on a pro forma basis. This growth was driven by strong fundamentals and our marketing efforts.

More specifically, our wellness center grand opening activities, which started right out of the gate in early February. This localized marketing strategy remains the cornerstone of helping to deliver our smarter pet health mission. And we believe that, especially in today’s environment, our convenient and affordable health care solution is even more relevant to pet parents across the country today. However, in collaboration with our retail host partners and in conjunction with local and state requirements, the pandemic forced us to make some rapid decisions in March. We started closing clinics on March 14 and had all clinics closed by March 20. In many states, veterinary wellness was not considered essential amid growing concerns around the availability of personal protective equipment, or PPE. And given that our community clinic model tends to attract lines of waiting parents pet parents, a challenge for social distancing, we determined that temporary suspension of services was the prudent course of action to protect our employees in clinic, our host retail partners as well as our customers. During this time, it was critically important that we ensure our services team remained engaged as we adopted new virtual components to our model and prepared our reopening strategy. We have focused on retaining our well-trained and unique labor force by continuing to pay our field operations team at 2/3 of their wages.

Overall, the variable cost nature of the Services business has resulted in our ability to redeploy our workforce, evolve our business model and reduce the costs in order to continue to strengthen our model. We have made important adjustments during this pandemic in order to support our pet parents as they adapt to a “new normal”. The most important adjustment being the development of a telehealth platform that includes telemedicine. PetIQ is uniquely positioned to tackle virtual medicine as the fourth largest veterinary employer in the country, engaging with more than 1.3 million pets in 2019. Our telehealth service will launch next week on May 12 to all of our loyal pet parents. Our PetIQ veterinary health line will be available every day from 7:00 a.m. to 7:00 p.m. to assist pet parents with questions about their pet and general pet care. This is the first step towards a more comprehensive telemedicine platform that will be available on a state-by-state basis, depending on the prevailing regulations that dictate these virtual veterinary client-patient interactions. Finally, with respect to our clinics. Our phased approach to start the reopening process starts tomorrow, May 8, with the reopening of 23 VetIQ wellness center locations. We will be incorporating curbside service to promote social distancing and enhanced safety procedures. Clinic staff will incorporate responsible PPE requirements, personal hygiene protocols and extra steps to clean and disinfect our clinics before and after every patient.

As we adapt our operations to the current environment and implement enhanced safety measures, we will look to expand the openings to more wellness centers and our community clinics in a safe, smart and phased approach. We look forward to resuming business across the country in the weeks and the months ahead and delivering pet parents convenient and affordable pet care, a need we absolutely know exists today.

I would now like to turn the call over to John.

John Newland — Chief Financial Officer & Corporate Secretary

Thank you, Susan.

To start, I would like to echo Cord and Susan’s remarks and thank our tremendous team for their efforts during this unprecedented time. As a result of their hard work and dedication, PetIQ remains well positioned in the marketplace. Our business was performing in line to ahead of our expectations in the first two months of the quarter until mid-March as a result of COVID-19. Our Product segment generated strong results for Q1, with our sales increasing each consecutive month, quarter, supported by heightened consumer concern around and demand for essential pet health and wellness products. The momentum we are experiencing in our Service segment during January and February stalled as we were forced to temporarily suspend our operations in March. Importantly, the financial strength that our Product segment provides our broader business became increasingly apparent, demonstrated by our record first quarter sales and growth and adjusted EBITDA, especially in an uncertain environment like we face today.

The three strategic acquisitions we have completed in the last three years have been highly complementary and provide us the flexibility to maintain a long-term view of our strategic and financial position. As a result, consolidated net sales were better than expected in Q1, increasing 25.8% to a record $186.8 million. I’m also pleased to report a 33.1% increase in our adjusted EBITDA to $14.5 million, which expanded 40 basis points from a margin perspective versus prior year. At the segment level, our Product segment net sales for the quarter were $166.3 million, an increase of 31.9% year-over-year. Segment-adjusted EBITDA before corporate allocations was $24.3 million, an increase of 79.1% compared to the first quarter last year.

The uptick in product sales growth during March was more focused in our e-commerce channel. While this channel sale shift late in the quarter impacted Product segment gross margin, we were once again able to leverage our fixed G&A, which is a primary driver for the strong growth of segment-adjusted EBITDA. Additionally, our manufacturing business continues to perform to our goal of 25% sales growth due to the success we’re having in integrating our brands such as PetArmor into our customer network. Within our Services segment, net revenues decreased 8.3% for the first quarter to $20.5 million. Excluding the contributions from our wellness center initiative, first quarter adjusted Services segment net revenues decreased 12.6% to $18.2 million. Services segment adjusted EBITDA was $2 million, a decrease of $3.3 million compared to $5.3 million generated in the first quarter last year. Prior to suspending operations, the service organization was experiencing double-digit growth in pet counts and average ticket sales across all of our clinics. We estimate that the impact on the Service segment due to the closure was in excess of $5 million of revenue, 1,200 basis points of segment gross margin contraction and approximately $3.2 million of adjusted EBITDA impact.

The service organization has an 80% variable cost structure with a 20% fixed component. The variable costs are mostly labor and rent to host partners, which is typically in the form of percentage of revenue. Today, we aren’t capturing the full savings opportunity that is available to us, but this is by design. We are highly motivated to restart service operations. And for that to happen, we need our staff in place and ready to work. So we made the decision to continue supporting those employees with 2/3 of their wages while we manage through this disruption. We are thinking about this as a strategic investment in the business. When you consider our variable versus fixed expense, within the context of the current environment, we are not taking advantage of the entire 80% variable expense due to our decision to pay these wages. Accounting for this incremental spend, we are saving approximately 60% of the expense versus the full 80%.

So the question is, what does this mean for our 2020 outlook? At this point, we are withdrawing our previously announced guidance for the full year 2020, which did not include any impact from COVID-19. This decision was based on the fluidity of the current environment and the unknown speed of recovery in our Service business. However, we would like to provide additional detail on our April results. Our Product segment net sales acceleration in March has continued to accelerate further to start the second quarter. We are pleased with the strong momentum we are seeing in our Products business, and the consumption patterns are supporting channel inventories, which speaks to the channel shift that is happening within the industry. Our services organization will begin to reopen wellness centers and clinics in certain markets at the end of this week. I’d also remind you that the pending Capstar acquisition continues to progress with an anticipated closing in early third quarter. This high-margin product acquisition will be extremely accretive to our business, and we estimate that it will add approximately $20 million of EBITDA contribution on an annualized basis post close.

As it pertains to our balance sheet and liquidity, our long-term debt, which is largely comprised of our revolving credit facility and term loan, was $325.4 million as of March 31, 2020. The company has total liquidity of approximately $53.8 million, which includes $28.1 million of cash and $25.7 million of availability on our revolving line of credit. I’d note that we have an additional $15 million available via an accordion feature of the credit agreement for a total of $68.8 million of liquidity. From a working capital perspective, accounts receivable increased $60.2 million, and inventory increased $39.1 million compared to December 31, 2019. This reflects the seasonal peak in inventory in what is the busiest seasonal period of the year for us. In fact, first quarter ending inventory represents approximately five weeks of supply, which speaks to the velocity of product sales this time of year. On the receivables side, our higher balance reflects a seasonal peak in sales that happens in March and flows in the second quarter.

I’d also share a couple of key observations that may be helpful as you consider our cash flows, working capital and capital requirements within the scope of the pandemic. First, the temporary suspension of our wellness center build-out strategy more than offsets any near-term carrying costs associated with the service organization, including wages being paid to consumer-facing staff that are awaiting reopening. This is due to the significant profit contributions from our Product segment that we expect to continue to improve with our more diversified and balanced manufacturing capabilities. Second, from a working capital perspective, this is the peak of the season. We are turning inventory rapidly, fulfilling reorder sufficiently and seeing little exit evidence of excess channel inventory. First quarter should represent the high watermark in terms of working capital, with cash returning to the business in the coming quarters.

When taken together, you have a growing products business contributing cash, working capital inflows accelerating and a temporary reduction of capex, which we believe puts PetIQ in a position to drive free cash flow and build cash in the quarters ahead. In closing, we are very pleased with our first quarter 2020 results and believe that we are well positioned to navigate the current environment and emerge even stronger with broader capabilities and bring convenient and affordable pet wellness products and services to pet parents in the formats that best fit their lives.

With that overview, Cord, Susan and I are available for your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Bill Chappell of SunTrust. Please go ahead.

Bill Chappell — SunTrust — Analyst

Thanks, and good afternoon as well.

McCord Christensen — Chief Executive Officer and Chairman of the Board

Thanks, Bill.

Bill Chappell — SunTrust — Analyst

Just I guess, first question on the services side. You had talked about the wellness centers kind of getting double-digit growth in headcount and services revenue. I guess, before this hit, can you give a little more color there, especially on some of the new Walmart locations you added back in the fall? Or is this coming from more of the older stores you’ve done over the past year? And on that same vein, kind of any update on these new 27 doors that postponed? Is that 2Q? Is that 3Q? How far has that pushed out?

McCord Christensen — Chief Executive Officer and Chairman of the Board

Thanks for the question, Bill. I’ll let Susan take that and answer that question. Go ahead, Susan.

Susan Sholtis — President

Yes, I’d be happy to. Thank you.

So in regards to your first question, Bill, in regards to the growth that we were seeing, it is actually in not only the new VetIQs that we had opened, but it was also in our conversion clinics as well, too. I think if you recall, in early February, we orchestrated really substantial grand opening activities around all of the clinics that we opened in fourth quarter of 2019. Those activities really spurred and alerted pet owners in the area to come to our clinics. So the double-digit growth that we were seeing was not only in more of our standard greenfield, but it was also not in our standard conversions, but it was in our greenfield clinics as well, too. So those activities were working for us incredibly well.

In regards to the 27 units that are basically sitting out there, we have those available. Those are in 12 states. We’re going to continue to keep those closed. We have a grand opening reopening strategy that we have put together. It is literally in five different phases, and we will open those as part of that 5-phase process.

Bill Chappell — SunTrust — Analyst

Got it. And just on that before I go to the product side, I mean, do you expect a pent-up demand for your services as all of them open up? And how do you work it with social distancing?

Susan Sholtis — President

Yes. It’s a great question. The so first of all, there is truly pent-up demand, and we know that because our customer service lines have not stopped since we closed. So customers, our pet owners, are clearly calling us, asking when we’re going to reopen. So I do believe that there is pent-up demand. Second of all, our retail partners are also receiving those phone calls as well. So people are looking for us to come back. I think that come back and look at what’s happened with the COVID-19 situation, many veterinary clinics, while they continue to see pet owners, they were seeing them in only emergency situations. And so there is a need out there for wellness, and we are truly coming in to reopen, to help to start to provide those services to pet owners who are looking to come in and to get their booster vaccines or to get their vaccines because they’re due on an annual basis. So I definitely think that there is pent-up demand.

Dr. Olavessen, I think as you remember, we she is our Chief Medical Officer, and we brought her on board in first quarter. She has literally written brand new protocols for each phase of our openings, of our practices. And as you can probably imagine, first of all, with these initial VetIQs that we’re opening, the 23, we will be implementing curbside service. Curbside service looks and acts and feels very different than just having a group of people standing in a clinic. So we have taken absolutely every step that we possibly can through new protocols to make sure that, number one, our people have the appropriate PPE and they do, but then also to make sure that we’re keeping pet parents safe as well, too.

Bill Chappell — SunTrust — Analyst

Got it. Well, I’ll turn it over.

McCord Christensen — Chief Executive Officer and Chairman of the Board

Thanks so much.

Operator

The next question comes from David Westenberg of Guggenheim. Please go ahead.

David Westenberg — Guggenheim — Analyst

Hi, thanks. Sir, for taking the question. And So I want to start with labor here. Some of the data points we’ve been picking up is that there could be some policy changes and potentially more vet-tech responsibility. Is that a possibility that you’ve heard? And then just changes in the labor market, generally, right now, there is an economic impact with this. Some of the independent veterinarians are seeing some changing dynamics. So just wondering the way you might think about policy and labor.

Susan Sholtis — President

Yes. Cord, I’m happy to take that question.

McCord Christensen — Chief Executive Officer and Chairman of the Board

Yes. Go ahead, Susan.

Susan Sholtis — President

I think that yes. Now I think, David, one of the benefits, if you can say that is the benefit, of COVID-19 has been the advancement in veterinary medicine. And not only has it been the advancement of telemedicine, as you know, but it is also going to be the advancement of better utilization of veterinary technicians and the skill set that they bring to veterinary practices. So we continue to monitor that on a state-by-state basis because a lot of these decisions are made at the state level. But on a daily basis, Dr. Olavessen continues to keep track of all of those changes that are happening to ensure that we can truly capitalize on those as they happen.

David Westenberg — Guggenheim — Analyst

Got it. And then I just want to talk about what might happen in the fall here. There’s a couple of different dynamics. Number one, 1-800-PetMeds talked about an early planned 6Tsand that they experienced due to warmer weather in the Northeast. Is that consistent with kind of what you’ve seen on the product side in the business? And then in the same kind of vein, if you have seen I mean, I guess there would be pent-up demand. This is a continuation of the pent-up demand question, but I don’t think you’re going to see missed appointments in April and then all of a sudden they all come in flooding in May. So can you maybe talk about what might happen in the back half of the year? Because you see actually an extended pent-up demand. So maybe this necessitates opening up clinics even in the fall and winter where you haven’t necessarily did it just because there is this pent-up demand effect.

McCord Christensen — Chief Executive Officer and Chairman of the Board

So Dave, I’ll take the first part. We definitely saw in the January, February time frame the benefits of such a light winter in the early planned 6Ts and kicking off and was a big part of us seeing such a strong momentum going into the first quarter. It’s been years since we’ve had this effect, and it was fun to see the early season starting to give us those additional doses of consumption and seeing those sales kick off.

The acceleration that then took place in March, we think, was coupled with that early planned 6Ts and some of the channel shift going on as our channel became a very good alternative or a way for people to get access to health care for their pets using both over-the-counter where they weren’t getting to the vet, or getting their pet prescriptions filled at a faster rate through the channel where they could do it from the safety of their home and work with our veterinarian through phone and otherwise to get those. So we saw that benefit. We’ve seen it continue to accelerate going into the second quarter. I think the second part of your question, I’ll let Susan answer, and she’ll be more positioned to talk to that.

Susan Sholtis — President

Yes, I’m happy to, David.

The I believe that, that pent-up demand is going to trickle because we have dealt with this for an extended period of time. I do believe that, that pent-up demand is going to start trickling into the fall, probably further than we would traditionally expect for that, too. But I also don’t believe that, that necessarily dictates how we go about opening our clinics. We do have a plan that is very much centered around safety, it’s centered around process, it’s centered around training, and it’s centered around pet parents and demand.

One of the most important things that we have to do starting tomorrow is to really gauge that pet parent demand and making sure that we understand how that is flowing because that will also help to dictate how we roll out the clinics. So I wouldn’t say that we necessarily believe that everything that we’re going to have a chunk of clinics opening up in the fall, but I think that the consumer is basically going to dictate that.

David Westenberg — Guggenheim — Analyst

Thank you very much.

Operator

The next question comes from Joe Altobello of Raymond James. Please go ahead.

Joe Altobello — Raymond James — Analyst

Thanks. Hey guys, good afternoon. So first question, I’m not sure I heard it right. You mentioned that the Perrigo business the acquired Perrigo business is tracking to 25% revenue growth this year. And related to that, I’m not sure if you guys gave a number in terms of how much that acquisition contributed to product sales in the quarter.

McCord Christensen — Chief Executive Officer and Chairman of the Board

I think great question. Good to hear from you, Joe. I think they the acquisition absolutely is tracking to a number that is better than 25% from the base that was there and 25% incremental new business for the total company through that organization. The difficult part of separating out the exact performance of the business is, in addition to that performance, we’ve made some strategic decisions to purposely cannibalize some of our own business with brands to consolidate the performance of those brands, the marketing dollars invested. And by doing that, the integration is quickly integrated and caused the numbers to blur to where it’s difficult to say what was which part, and so we’re only reporting what the total growth rate was on the business. So we’re not separating out just the individual Perrigo business, but we can tell you with confidence that we are on track to see the 25% increase.

One of the headlines I would share with you is in the month of April. We had the highest month of shipments of product out of that plant since a month that happened in April of 2017. And so it’s after that many years, we’ve had a record shipment month, and we’re on track to have a similar month in the month of May. So very exciting times with the Perrigo acquisition, how it’s performing.

Joe Altobello — Raymond James — Analyst

That’s helpful, Cord. And then maybe secondly, a quick question for John on the balance sheet, in particular, accounts receivable. I guess the fact that, seasonally, this is the time when receivables are going to tick up a little bit, but it looks like it doubled year-over-year. And I’m curious how much of that was due to the surge late in the quarter, and how much of that was due to the channel shift that you guys are seeing toward e-commerce.

John Newland — Chief Financial Officer & Corporate Secretary

Yes. Joe, that’s a great question. I would tell you that the cadence of the sales, as they occur in the first quarter, is it starts out pretty slow. And then in the months of January and February, it grows, and virtually almost 50% of our sales for the quarter occurred in the month of March. So based off of that and the days of receivables outstanding, it has a compounding effect on your overall receivables and growth grows the balance as a result of the cadence of sales more than anything else regardless of customer concentrations or whatever.

Joe Altobello — Raymond James — Analyst

Okay. So was it driven by channel shift at all?

John Newland — Chief Financial Officer & Corporate Secretary

No.

Joe Altobello — Raymond James — Analyst

All right, thank you guys.

Operator

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

Jon Andersen — William Blair — Analyst

Good afternoon, everybody.

McCord Christensen — Chief Executive Officer and Chairman of the Board

Good afternoon. John.

Jon Andersen — William Blair — Analyst

On the services reopening, how was the first batch of stores or centers that are going to be reopened, how was that determined? Was that a state-by-state or kind of reopening more driven by regulation? Or was it driven by some internal approach? Just trying to understand that a little better.

McCord Christensen — Chief Executive Officer and Chairman of the Board

Susan, do you want to go and take that?

Susan Sholtis — President

Yes. Jon, I’d be happy to address that.

There are four factors that we considered when we chose the first 23 to reopen. The first being safety, but when I talk about safety, you have to look at the state, you have to look at the state veterinary medical association and local guidelines first. So we had to check the box on all three of those factors before we move forward to part number two. Part number two is making sure that our retail host partner is also prepared as well, too. Because, obviously, when we talk about social distancing, additional PPE, etc, we needed to make sure that our host partners were ready to receive us back into those facilities. The second item was just process whether or not the location was conducive to providing touchless service, making sure that we have parking lot space in order to be able to go out to retrieve the pet. The parking lot space was also part of our assessment.

Training, can we optimize the training process with our team? Is it the right team, meaning have they been in place for a while? Are they going to be able to grasp and to take these new measures and be able to put them into place? And then finally, can we optimize the way that we tell pet parents as well, too? So geographically makes tons of sense because then we can notify pet parents of our new processes and do that in a very consolidated way.

Jon Andersen — William Blair — Analyst

That’s really helpful. Does that should we assume that this is the reopening initial is going to affect multiple host retailers? Or will it be just one or 2?

Susan Sholtis — President

So the initial 23 VetIQs that we will be rolling out tomorrow, those are across 16 states, and they’re with two retailers. Think about those facilities, they are the clinics that we currently have in partnership with Walmart and with Meijer. And what makes them a great place to start is that they have the separate doors. They have that they’re segmented off and they have those separate doors, which, again, make it really easy for us to make sure that we’re implementing all the appropriate safety protocols.

Jon Andersen — William Blair — Analyst

Makes sense. You touched on this a little bit. It’s probably for Susan. The you’ve had a grand opening strategy that you executed in the fourth quarter, with the openings you did in the fourth quarter. As you look to reopen here, do you have to kind of run that process again across all of the locations to build awareness that you are open for business and drive the pet traffic?

Susan Sholtis — President

Jon, I would say that in regards to the grand openings that we already had and mind you, when we were at the point of getting ready to close down, we had gotten through maybe half of those grand opening events that we were going to do for the year. And so again, that tremendous performance with the ones where we had the grand with those grand opening events. So I don’t expect for us to go back and have to do re-grand openings for those clinics that we’ve already conducted, but we definitely will continue to follow through on the grand openings with those that we did not.

Jon Andersen — William Blair — Analyst

Great. Great. And then on the product side of the business, so the Capstar is, I think, you said early in the third quarter, you expect to close just thinking about funding that acquisition, it sounds like you’re in a good liquidity position. Is there anything we should be thinking about there from either an execution standpoint or a funding standpoint that might be different than you’ve talked about in the past?

McCord Christensen — Chief Executive Officer and Chairman of the Board

Yes. Thanks for the question, Jon. We’re excited about Capstar acquisition, and the brand is performing better than what we had been projecting to perform during this time of year and which means it will be in a position to continue to over deliver against our expectations from it. We’ve always said we would use either our existing credit facility or a like type financing event to finance it. John and myself and various Board members are involved with that, and we feel confident we have a pathway forward that’s very good to be able to accomplish that goal. So right now we feel like we’ve got a good handle on getting it processed through one of these sources that we’re using that it will be a very accretive deal for the company. And we look forward to clearing the final FCC requirements so that we can still stay on track, which we think we will be able to do to close in early third quarter.

Jon Andersen — William Blair — Analyst

Great. And is there an opportunity I can’t recall if you’ve talked about this. Is there an opportunity to use some of the manufacturing assets that you have to produce that product in the future? And thus there’s some cost synergies around that. Is that your expectation?

McCord Christensen — Chief Executive Officer and Chairman of the Board

I think what we’ve always said, we would never have the confidence to even bid on it if we didn’t have the Perrigo acquisition and their manufacturing capabilities to be able to do the manufacturing of the product at some point. We do have a service agreement with Elanco for them to produce it at the same cost as they produce it for themselves for up to three years. And if there are synergies available, we’re obviously going to be motivated to get it done sooner, so we can take advantage of those. We don’t believe there’s any negative impact, but we won’t be able to do it at least equally as good or as affordable. But we have not determined yet or ready to announce any synergies. As you recall, that brand will be the most profitable, highest margin brand in our portfolio when it comes over. And so we’re just excited to have it to be able to foster it, grow it and see it continue to contribute more to the company. But it’ll definitely have to be introduced in our plan at the right time.

Jon Andersen — William Blair — Analyst

That’s really helpful. One last one for me. So the Products business, congratulations, has been extremely strong. It sounds like it remains so. Could you talk about the owned brand part of that business? I think you’ve talked about the opportunity to step that up in some of the conversations, I think, you’ve had with important retailers, particularly online. How is that going, just overall, with respect to the owned brand part of that?

McCord Christensen — Chief Executive Officer and Chairman of the Board

That’s a great question, Jon. And I actually just finished doing a review this past week of looking at what the combined mix was of distributed versus manufacturing in Q1 of 2019, if we would have owned Perrigo then and looking at what it is now. And I’m happy to report with the dramatic increases we’ve seen in sales and the surging of the business that the mix between distributed and manufactured still is in that 70%, 30% range we’ve been talking about. So as you’ve seen these increases, our manufactured products continue to keep up with the growth. They’ve maintained that mix, which means we are generating those profit dollars, and that’s why you’re seeing the expanded margin in that category for the business. And so our retail relationships are solid, we’re expanding our items, we’re taking care of them better, we’re getting incremental placement by doing the right GAAP analysis for the companies that we serve, and we’re getting the placement. And ultimately, we’re just seeing the brands perform. So we’re very excited about seeing that mix continue to stay in a similar place, even though we’ve seen such significant increases, and most people would think it would be only because of the distributed product. It’s not we’re giving a good balance.

Jon Andersen — William Blair — Analyst

Excellent, thanks so much and good luck going forward.

Operator

The next question comes from Kevin Grundy of Jefferies. Please go ahead.

Kevin Grundy — Jefferies — Analyst

Hey, good afternoon everyone, I hope that you and your families are doing well. Question for Cord on the channel shift online. So obviously, this has been broad-based and huge trends here as a consequence of the unique nature of this recession. But Cord, I wanted to get your updated thoughts on potential benefits to your business. Maybe you could give us an update here on what percentage of your Products business is now online, talk about implications here as well from a margin perspective. Or even like to Joe’s question before, I don’t know if there’s a big difference here at all in terms of payment terms with respect to some of the vendors you’re dealing with online. And then I have a follow-up for general liquidity.

McCord Christensen — Chief Executive Officer and Chairman of the Board

Okay. Thanks, Kevin. I appreciate the question.

Yes. We definitely have been benefiting from the volume increasing online. I mean, obviously, the overall Product business was at 32% for the quarter, and the online growth was slightly above that, about 10% better than that from a growth perspective. So we still saw great growth across our brick-and-mortar and other customers, but did see a slightly larger percentage there. We are seeing that our overall mix of online versus rest of the company is also up about 10% from where it was a year ago. So in line with the additional contribution.

As we said, also, we’ve got a focus at mixing our manufactured product with our distributed product. In online, we haven’t caught up quite as fast as we’d like to, but we’re making progress, and that will definitely help our mix from our margin perspective. And we’re making sure that we’re being very attentive to just not creating friction where consumers want to buy the product, they need to be able to buy it. And we have the ability to leverage these sales with not a lot of incremental G&A. So all the sales that happen are accretive to the earnings and accretive to the business, albeit sometimes not at the same percentage. And it’s why we’ve talked about the mix over time to get us to a 15% EBITDA margin. So we’re very happy with the contribution. We’re very happy with the progress of keeping our mix growing the right way there and in getting our margins in that channel to be in a better place.

Your second question, we definitely have seen some increases in a couple of our online customers. One in particular that we have a longer payment term schedule, which is consistent with what they have with all of their vendor base. And it is a contributing factor to our receivables becoming larger in that area during this time.

So I hope that answers your question.

Kevin Grundy — Jefferies — Analyst

No. That’s helpful, Cord. One, I’m not sure if you can comment. What percentage of your online business at the end of the quarter or, excuse me, what percentage of your Products business is now online? Is that something you can share?

McCord Christensen — Chief Executive Officer and Chairman of the Board

Yes. We don’t break it out specifically to that point, Kevin. I think we’ve let people know that it’s definitely climbing up in the high 20s into the low 30s, and then we’re up running right now this quarter 10% better than that. But we don’t give a specific number.

Kevin Grundy — Jefferies — Analyst

Okay. All right. A quick one just for John on liquidity. So I think the disclosure is, including the accordion feature, you have about $70 million between cash on the balance sheet and then available financing. It didn’t sound like you were overly concerned with the cash use from operations. It sounded like that was relatively in line with your expectation. Maybe you can correct me if I’m wrong with that.

And then between the puts and the takes, the Products business is obviously performing really well, unprecedented circumstances that you’re dealing with on the Services side. But between the puts and the takes with this, as we think about how much free cash flow this business is going to generate, and I know you don’t want to guide so I don’t want to try to put you in a corner, but how should we think about that? I think that the number sort of free cash you gave us, somewhere like in the $40 million levered free cash flow range, is maybe just speak broadly, and that would be helpful.

John Newland — Chief Financial Officer & Corporate Secretary

Yes. Two great questions. I’m going to start with the second one and talk about the free cash flow generation. So…

Operator

Excuse me, Mr. Newland, would you be able to maybe come a little bit closer to the phone…

John Newland — Chief Financial Officer & Corporate Secretary

Sure. How’s that? Is that better?

Operator

Thank you, sir. Yes, sir. Thank you. Yes. So we’ll talk about the puts and the takes on free cash flow first. So what are we doing? We’re not spending the capex, and we’re not funding the original operating expenses and operating losses associated with the clinic rollout. But at the same but we are funding the 2/3 of the pay for our associate base as it’s ready awaiting reopening. The cash generation from operations comes from our Product business. But the puts and the takes, at the end of the day, our free cash flow generation will be as good as, if not better, than what we communicated earlier. And that’s just the nature of additional cash flow outflows versus the savings that we have. So we’re very confident about that. And your first question, Kevin, yes, this is this we have this discussion every year. This is our highest use of capital as we go into the height of our selling season. We talked about the cadence of the sales and how that grows our receivables exponentially at the end of first quarter. That will continue all throughout second quarter. And then, as you remember, our inventory levels begin to decrease right about the second two weeks before the end of second quarter. And then that gradual decrease will continue throughout the remainder of the year. So absolutely right in line with expectations. We’re comfortable with our liquidity position, and I’m pleased with where we are. The next question comes from Brian Nagel of Oppenheimer. Please go ahead. Hi, good afternoon. Thanks for taking my questions. So the first question, a bit of a follow-up on the product side, recognizing that normal year, the business does accelerate into March. But is there a way to really think about, as we look at this past quarter, how much better that acceleration was as a result of due to the crisis that really started to take hold in mid-March, meaning that other with other retailers, other avenues closed, so there was a benefit coming to PetIQ, and then how that continued into here into early Q2?

McCord Christensen — Chief Executive Officer and Chairman of the Board

Brian, thanks for the question. I appreciate it. I think we’ve been coming pretty accurately determining about how much the growth is going to be and getting closer to our number. And we definitely had March be significantly ahead of plan, where January, February just only slightly ahead of what we thought would take place. And so it was a very noticeable significant difference in volume. And we’ve seen that number even widen and get bigger going into the month of April and really quarter-to-date. So we definitely, as we’ve said in message, that the ability for our Product business to overcome some of that impact that took place from closing the clinics in Q1, we’re seeing that although we’ve given the mix on what we think sales will be in the second quarter, a much larger number.

And the performance from that, that are increases in our Product business can offset most, if not all, of the impact from the closing of our service organization. And we’re, again, incredibly grateful to see that happening. We’re up at percentage rates that are far above what the vet channel is down. So we believe a lot of it is sustainable and stuff that will stick and be there as people see how easy and convenient and affordable to do business with our channel. And so we’re excited to see this kind of shot in the arm of increase through this, and we believe it’s going to be something that’s going to take us to another level as a company in this space.

Brian Nagel — Oppenheimer — Analyst

All right. As a follow-up to that, and again, this is similar to follow-ups to prior questions too, but because you’ve seen now this acceleration, if you will, in the online business. If you well, we’re waiting to see how this shakes out as our economy hopefully should renormalizes but normalizes. But to the extent that consumer behavior has changed somewhat towards online sales, does that how does that change your relationships with your physical retailers as you deal with the happenings in online operations?

McCord Christensen — Chief Executive Officer and Chairman of the Board

Well, I didn’t get what you asked. So I’ve got to get my head around your question. So how does it change, like, with our people to have both brick-and-mortar and online stores?

Brian Nagel — Oppenheimer — Analyst

Yes. It’s a bigger sure, what I’m saying is the accounts we have where it’s an omnichannel. So they have the store then also an online operation. I’m assuming within that business, more of their sales so more what you’re selling to them sold online, does that change the underlying relationship?

McCord Christensen — Chief Executive Officer and Chairman of the Board

No. We haven’t seen any change in the underlying relationship. I mean, we’ve been balancing, having joint communications from both sides of their business where they do have independent people that run the online versus brick-and-mortar. And the two large companies that really have really great omnichannel strategies and online business, we’re still seeing and having some of our best one of our best quarters we’ve ever had with even the brick-and-mortar side of their business. It’s one of the reasons we referenced that our retail brick-and-mortar channel also saw a great participation in the shift from the veterinarian channels into the space.

And so we haven’t seen any change at all in that environment, Brian. I think the other thing that’s happened in this environment is we’ve been battle-tested for years as a company and our ability to perform in this channel with the animal health industry. And I’ve never had more conversations with the heads of the companies we held support and then be amazed at just how good we do what we do that we’ve had no interruptions that our plants have run at better than 99% fill rates and through this entire environment. And we’ve literally had every shift fully staffed to keep that happening. So there’s been no interruption for their businesses either. So if anything, I think the value that we are generating for all people involved has just increased, and our value to the market and the industry has gotten even greater through our performance in this environment.

Brian Nagel — Oppenheimer — Analyst

Okay. I appreciate it. Thank you very much.

McCord Christensen — Chief Executive Officer and Chairman of the Board

Thanks guys.

Operator

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

McCord Christensen — Chief Executive Officer and Chairman of the Board

I want to thank everybody for joining us today. And obviously, as we’ve stated many times, our first priority is keeping our employees, our partners, our pet parents and their pets safe and healthy and doing our job as an essential business service to make sure people have access. We’re obviously excited by the results we delivered in the first quarter. We’re extremely excited with what we’re seeing in second quarter so far and couldn’t be more excited to start opening our clinics and being able to help serve our pet parents. And we look forward over the weeks and months to getting all of our clinics back up and running and being able to service their needs.

I look forward to interacting with all of you very soon and hope all of you keep you, your families and all of your associates safe and healthy through you’re managing your own situation through this pandemic that affects all of our lives. Thank you for joining us today, guys.

Operator

[Operator Closing Remarks]