PetIQ, inc (PETQ) Q1 2023 Earnings Call Transcript

PetIQ, inc (NASDAQ: PETQ) Q1 2023 Earnings Call dated May. 09, 2023

Corporate Participants:

Katie Turner — Investor Relations

Cord Christensen — Chairman & Chief Executive Officer

Zvi Glasman — Chief Financial Officer

Michael Smith — President & Chief Operating Officer

John Pearson — Senior Vice President, Head, Services Division

Analysts:

Rupesh Parikh — Oppenheimer — Analyst

Jon Andersen — William Blair — Analyst

Bill Chappell — Truist Securities — Analyst

Corey Grady — Jefferies — Analyst

John Lawrence — Benchmark — Analyst

Presentation:

Operator

Good day, and welcome to the PetIQ Inc. First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

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

Katie Turner — Investor Relations

Good afternoon. Thank you for joining us on PetIQ’s first quarter 2023 earnings conference call and webcast. On today’s call are Cord Christensen, Chairman and Chief Executive Officer; and Zvi Glasman, Chief Financial Officer.

Before we begin, please remember that during the course of this call management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements.

Please refer to the company’s Annual Report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and the company’s press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

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

And with that, I’d like to turn the call over to Cord Christensen.

Cord Christensen — Chairman & Chief Executive Officer

Thank you, Katie, and good afternoon everyone. We appreciate you joining us today to discuss our first quarter financial results. I’ll begin with an overview of key highlights then Zvi will review our financial results for the quarter and outlook. Finally Zvi, Michael and I will be available to answer your questions.

We are very pleased with our start to 2023. Our team delivered first quarter net sales and adjusted EBITDA above our guidance for the quarter. Net sales of $290.5 million topped our outlook of $270 million to $290 million. It has helped us achieve solid gross margin expansion and SG&A leverage resulting in record quarterly net income and adjusted EBITDA. Both our products and services businesses performed well in the first quarter and we completed the complementary strategic acquisition of Rocco and Roxie on January 13th for $26.5 million in cash.

As we discussed on our call last quarter, Rocco and Roxie is a super-premium brand with a strong and growing presence particularly in the e-commerce sales channel with their pet product offerings, which today primarily includes stain and odor products. This acquisition also expands PetIQ’s offering into premium dog supplements and jerky treats.

We believe we have a tremendous opportunity to grow Rocco and Roxie’s distribution beyond e-commerce to brick-and-mortar retail to accelerate growth of their existing business in e-commerce and to introduce new SKUs in 2023 and beyond for all sales channels. The Products segment’s net sales of $259 million increased 4.5% compared to the prior year period reflecting broad-based growth across all product categories and sales channels.

When you look at all sales channels combined year-over-year consumption growth in the over-the-counter flea and tick category was the strongest that we’ve seen in the last 18 to 24 months during the first quarter of 2023. In Q1 of this year over 50% of the over-the-counter flea and tick category sales were generated online and importantly PetIQ’s portfolio brands continue to capture a disproportionate amount of this growth and dramatically outperformed the broader category as evidenced by our Q1 results.

As we’ve consistently said if you only look at the Nielsen measured sales channel for flea and tick it’s just a portion of the total category. As a result Nielsen data does not tell the complete story for the category results and now represents less than 25% of the market volume for the OTC flea and tick categories in which PetIQ competes.

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

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

Included in last year’s base for consumption, is a low-margin SKU within the dollar channel that we strategically chose to discontinue. If you move sales of this product from the base, our consumption for our portfolio of OTC flea and tick brands, would be up over 12% and well ahead of the total category consumption.

Our pet supplement segment continues to see healthy consumption growth in the first quarter of 6.5%, as compared to the prior year period. This lower growth in our pet supplements business versus the total category was expected, and due to the planned transition of a significant PetIQ SKU, in brick-and-mortar during the first quarter of 2023.

As a result, approximately eight weeks of sales were missed in Q1 this year that we had in Q1 last year. When you take this into account our PetIQ supplement brands would have been up over 12%, and better than the broader category consumption of 10.9% for the period ended March 25 2023.

Importantly, we completed the SKU transition in Q1, and the early read across retailers is an acceleration in consumption. In addition, our dental treats brand Minties grew plus 22% and gain 36 basis points of share within the category. Dog treats increased 157%, driven by our Pur Luv brand and overall consumption across all of PetIQ branded offerings, and across all retail channels grew plus 10.4% for the 12 weeks ended March 25 2023.

PetIQ manufactured products represented 26.2% of our Products segment, net sales in Q1 2023 compared to 28.4% in Q1 of 2022, pro forma for the acquisition of Rocco & Roxie. This mix was slightly below our expectations for the quarter, as our distributed business had a more aggressive inventory build, with our top e-commerce partners late in the quarter. However, for 2023 we continue to expect to achieve our stated objective of having greater than 32% of Products segment net sales, from PetIQ manufactured products.

Now focusing on the Services segment. Our Servicing segment reported first quarter 2023 net revenue of $31.5 million, an increase of 12.6% as compared to the prior year period and in line with our expectations. We experienced improved cancellation rates, increased pet counts and increased average dollar per pet served, as compared to the first quarter of 2022.

Improved operating efficiencies and maturation of wellness centers, helped the Services segment achieved its best profit contribution quarter, since fourth quarter of 2019. We opened four wellness centers in the quarter and will continue to remain prudent, with our Services segment growth in 2023. We believe we are well positioned across our Product and Services segments to attract more pet parents to our health and wellness offerings, and are very pleased with our team’s execution, and ability to generate strong results for the first quarter of 2023.

We remain optimistic about our opportunities for growth in 2023, and our data across all sales channels in the Products segment for Q2 to date, continues to show that PetIQ is performing well across all categories. That said, we are still early in the year and our team is consistently focused on the control aspects of our business, but we are being prudent in reiterating our annual 2023 guidance given certain variables outside of our control like weather and timing of shipments for example, that can lead to fluctuations quarter-to-quarter.

In closing, we appreciate the hard work and dedication of our employees, in our manufacturing and distribution facilities as well as our corporate offices, for the commitment to our mission and core values and helping us to achieve these financial results.

With that overview, I’d like to now turn the call over to Zvi.

Zvi Glasman — Chief Financial Officer

Thank you, Cord. We’re pleased to achieve first quarter net sales and adjusted EBITDA ahead of our expectations. Today, I will discuss our quarterly financials in more detail, and our outlook for Q2 and the full year 2023. Q1 net sales were $290.5 million, an increase of 5.4% compared to Q1 last year driven by an increase in sales from both the Products and Services segments as well as the addition of Rocco & Roxie.

First quarter 2023 gross profit increased 8% to $62.3 million, resulting in a gross margin of 21.4%, an increase of 50 basis points from the first quarter of 2022 driven by higher profitability in the Services segment, partially offset by a higher mix of distributed product based on the timing of shipments late in the quarter and from lapping new PetIQ manufactured brand launches in the prior year period in the Products segment.

SG&A expenses for the first quarter of 2023 were $43.3 million compared to $48.2 million in the first quarter of the prior year. Adjusted SG&A was $39.3 million for Q1 of 2023, compared to $41.4 million in Q1 last year. As a percentage of net sales, adjusted SG&A was 13.5% a decrease of 150 basis points compared to the prior year period. The decrease was mainly due to lower compensation expenses resulting from operating efficiencies, one-time costs incurred in the prior year period, as well as lower legal expenses.

From a profit perspective, we reported record net income of $9.8 million or EPS of $0.32 the highest in the company’s history. Adjusted net income for the first quarter of 2023 increased 40.6% to $14.2 million and EPS was $0.45. Q1 EBITDA was $26.7 million an increase of 51.9% compared to $17.6 million in Q1 of last year. First quarter adjusted EBITDA was $30.7 million an increase of 25.7% compared to $24.4 million in the prior year period representing an adjusted EBITDA margin of 10.6% an increase of 170 basis points compared to Q1 of 2022.

Now, turning to our balance sheet and liquidity for the first quarter ended March 31 2023 the company had total cash and cash equivalents of $25.4 million. Net cash used in operating activities were $43.3 million for the first quarter ended March 31 2023 compared to $45.4 million used in the operating activities for the prior year period.

The change in operating cash flows primarily reflects higher earnings partially offset by higher cash usage for working capital. The company’s working capital changes are driven primarily by growth in accounts receivable and inventory due to our normal seasonal profile while accounts payable growth provided working capital benefit driven by increase in inventory and timing of inventory purchases. Our total debt was $452 million as of March 31 2023 compared to $452.9 million at the end of 2022. Notably our total debt is down $30 million for the comparable period in 2022 despite $26.5 million paid for our acquisition of Rocco and Roxie.

In addition to our cash on hand the company’s revolving credit limit is undrawn and has $125 million of availability, together representing total liquidity which we define as cash on hand plus availability of $150.4 million as of March 31. 2023. While we have no intention of making additional borrowings we would note that, our liquidity is ample and our credit facilities are flexible.

Our net leverage as calculated under terms of our credit facilities at the end of the first quarter 2023 was 4.5x consistent with the prior year period based on the timing of working capital needs to support the normal seasonality and growth of the business as well as the amount the company paid in the first quarter for its acquisition of Rocco and Roxie. We expect Q1 to be the highest net leverage quarter of the year and we expect to continue to reduce our leverage over the next few years. We believe net leverage at the end of 2023 will be lower than 2022. We continue to believe our consistent growth contribution from the Products segment and ongoing improvement in the Services segment positions the company to drive free cash flow and build cash in future quarters as well as opportunistically pay down our debt.

Now turning to our guidance. For the year ending December 31 2023 and as slow noted in today earnings and finnawe are reiterating our guidance that the company previously provided on February 28 2023 and as also noted in today’s earnings release and financial presentation available on our website.

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

For the second quarter of 2023, we expect adjusted EBITDA of $24 million to $26 million an increase of approximately 4%, compared to the prior year period based on the midpoint of the guidance. From an SG&A standpoint there’s approximately $1.5 million that we expect to spend in Q2 that shifted from Q1 of this year based on timing of advertising and promotions.

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

That concludes my financial review. With that overview Cord, Michael and I are available for your questions, Operator?

Questions and Answers:

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 — Oppenheimer — Analyst

Good afternoon. Thanks for taking my questions, also congrats on a nice quarter. So with the Rocco and Roxie acquisition, I was just curious, how the integration is going so far? And any surprises of note thus far?

Cord Christensen — Chairman & Chief Executive Officer

Yeah. I mean, no surprises so far Rupesh. Thanks for the question. We’ve known them for a long time. We’ve studied the business. They had very few customers doing a very concentrated business. So for our ability to bring their inventory into our system, start the distribution, start to really streamline things there’s really been no surprises so far.

We did have some business they were testing that we viewed as non-strategic that we decided to not continue with. It didn’t affect kind of the base earnings, but it did affect some of the sales. So if you back that out and look how we’re currently running, we still think we’re on track to year-over-year grow the base that’s profitable, the base of strategic a 20% kind of run rate base.

So no surprises so far, we’re ahead of schedule. Integration has gone extremely well. And by the way again, lots of white space and lots of things we think we can do to increase distribution really make things work and grow. Michael Smith, anything you’d add based on kind of your initial retailer conversations?

Michael Smith — President & Chief Operating Officer

No. The only thing I would add is just, some of the tests as we have moved the brain into brick-and-mortar. Especially on the supplement side, we’ve seen some better-than-expected trends and some real optimism as we see this brand, primarily playing in stain and odor today, but optimistic about the role it can play for us in some other premium spaces that we’d love to take the brand into overtime. And the early read on supplements is again better than what we initially modeled.

Rupesh Parikh — Oppenheimer — Analyst

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

Cord Christensen — Chairman & Chief Executive Officer

Yeah. Michael, you are the best one to answer that. So go ahead.

Michael Smith — President & Chief Operating Officer

Yeah. To the first part of your question, in terms of promotional activity, we did see some aggressive programs by some of the more Super Premium brands earlier in the season Feb-March. If you look at the net of the results of those on the category and those brands not a meaningful contributor to category performance or those brands’ performance. In terms of retailer inventory levels, I would say, on the whole, in the aggregate no major overages or underages.

There are some slight customers where we have one example, where they made an inventory replenishment system upgrade that is now flowing the inventory more JIT if you will, to demand versus some of the historical patterns we’ve seen in this category where retailers would take a very aggressive early season approach to build inventory well ahead of demand. But when you wash that all out across customers and brands we’re in a fairly healthy what I’d call a neutral inventory position across the retail channel.

Rupesh Parikh — Oppenheimer — Analyst

Okay. Great. Thank you. I’ll pass it on.

Operator

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

Jon Andersen — William Blair — Analyst

Good afternoon, everybody.

Michael Smith — President & Chief Operating Officer

Hey.

Jon Andersen — William Blair — Analyst

Hey. So e-commerce I think you said is now more than half of the OTC Flea & Tick business. Could you just comment on, some of the — again, the trends that you’re seeing there whether you expect that to continue? How big e-commerce could become if these trends persist? And how you specifically, how your business your brands are positioned online? It sounds like you’re performing well and taking share, but just discuss that a little bit that would be helpful. Thanks.

Cord Christensen — Chairman & Chief Executive Officer

Thanks, Jon for the question. I’ll let Michael start and then I’ll kind of clean up after he goes. So go ahead Michael.

Michael Smith — President & Chief Operating Officer

Yes, Jon, I’d hate to predict what the long-term share of e-commerce is going to be in this category. But I’d tell you the last two, three years, it’s continued to be on a pretty consistent march of taking meaningful share and grow — and actually growing the pie right? It’s one thing to shift share in a category. It’s another thing to actually grow the pie. One of the better things we’ve seen as e-com has continued to grow in the flea and tick category it is actually doing a great job of either bringing new customers in or getting compliance to be higher than it would have been if consumers were just purchasing in a brick-and-mortar environment.

So, on the aggregate healthy for the category. And I don’t see anything slowing that down candidly. If you look at growth rates for that channel relative to the balance of market we’re seeing 2x, 3x the growth rate for e-commerce versus balance of market.

And for PetIQ we are disproportionately outperforming in e-commerce for our portfolio of brands. If you go back three, four years you would have heard us say we were behind in that space. We were not as developed an e-commerce as we wanted to be. I would say on that journey we get caught up in 2022. And in 2023 we’re maybe more developed than the category as a whole.

So for us it’s definitely an engine for growth. Some of that’s due to making meaningful investments and ensuring that we’re winning in that environment and learning how to better utilize those investments over time. And we’re in a phase where that flywheel is really starting to spin and getting some great return on those investments and disproportionately winning in that channel.

Cord Christensen — Chairman & Chief Executive Officer

And I think I would add to that Jon is Michael and the team has put together a best-in-class team that we’ve invested in that’s internal now where years ago we were using external resources. We’ve continued to upgrade that team invest in that team. And as always focus wins the day. And that focus is clearly translated into our sales and our growth rates being better online. Our brand is performing better than what other brands are performing. So we’re happy with it. We’re going to continue to invest there and we see our brands continuing to expand and take share as we keep that focus on it.

Jon Andersen — William Blair — Analyst

That’s helpful. Thanks to both of you. One follow-up. On the manufacturing business that came in, I guess, at least as a proportion of your Products business below your expectations in the quarter. It sounds like there were some kind of onetime factor driving that. If anything with respect to your view on the manufactured side of the business growth rates and when you think about that part of your business, do you see more opportunity on the health and wellness — on the wellness side or more opportunity on the flea and tick side, or is it kind of both aspects? Thanks.

Cord Christensen — Chairman & Chief Executive Officer

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

So I think we’re — I feel like we still have tons of runway across our portfolio to continue to grow as a company across our portfolio and we’ll continue to I think show that in our numbers and our growth rates as we develop our business. So anything else you’d add Michael?

Michael Smith — President & Chief Operating Officer

I would just add that the way that you’re looking at that data is from a ships-out perspective and there’s always some lumpiness in the way that inventory flows especially if you think back to last year where we had a meaningful launch on our manufactured side of the portfolio that occurred in Q1 last year. Sometimes better look at consumption. And if you look at consumption, you’ll see our manufactured brand outperforming our distributed brands. So when you think of share of ships it’s going to look one way a lot of that is about the base. So when you look at share of consumption and the health of our manufactured portfolio consumption is probably a better way to catch that light.

Cord Christensen — Chairman & Chief Executive Officer

Jon just to be clear, we still are very clear that we are very, very focused on the data. We’re looking at the consumption numbers and we were definitely wanted to make sure everyone heard that we still think that 32% is an achievable number for the company and that the guidance we have out there originally is very achievable. So the consumption numbers not the shipment say that it all catches up. And for full year we should see the percentage close the gap and get to the right place.

Jon Andersen — William Blair — Analyst

Sure. Okay. Is Zvi on? I have a question for Zvi if could

Zvi Glasman — Chief Financial Officer

I am here. What’s the question?

Jon Andersen — William Blair — Analyst

Good. I just wanted to pull you in. Free cash flow for the year you’ve kind of inflected last year and delivered strong free cash. What’s the plan for free cash on a full year basis this year? And what are your priorities for use of that? Is it bringing debt levels down? Is that number one, two and three, or do you have other priorities in there as well? Thanks.

Zvi Glasman — Chief Financial Officer

Yes. We generated at our target of $30 million to $40 million of free cash flow last year. We have the same cash flow target this year, despite interest expense being $8 million higher. In terms of priority, first and foremost reinvest in the business that means things like supporting new brands, supporting our service business expansion and so forth.

Next would be paying down debt. We anticipate that debt will come down about a quarter of a turn between — by the end of this year versus last year. Importantly last year we peaked at a leverage rate of five in Q2. This year our peak leverage is 4.5 Q1. So our leverage will come down the balance of the year. And of course, if we get any great strategic acquisitions like we’ve done this year, we believe in R&R with Rocco and Roxie and some of the past acquisitions, those are always going to be priorities for us as well.

Operator

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

Bill Chappell — Truist Securities — Analyst

Thanks, good afternoon.

Cord Christensen — Chairman & Chief Executive Officer

Hi, Bill.

Bill Chappell — Truist Securities — Analyst

Just looking at — well, I’ll go with a follow-up. If you’re looking at the percentage of sales from manufactured as you said, you’re comfortable getting back to that 32% for the full year. Is there a particular quarter where that will kind of overcorrect, or do you expect it to be well above or be above 32% for all three of the next quarters? So the timing

Cord Christensen — Chairman & Chief Executive Officer

Yes. Yes. Q1 was kind of an anomaly. We expected it to be a little bit lumpy for Q1. Again there was some distributed brands that got restock heavily at the end of the quarter that skewed it slightly. But Q1 is always our lowest quarter for our manufactured brands and the consumption numbers really tell the story. But as far as leveling out I think it will be very evident through the rest of the year that we’re on track.

And right now consumption numbers are good. We need to see how consumption is as we get into some of the bigger months. May is a big month, June, July is a big month. But once we see those numbers I think we right now feel very good about getting back to 32% it should be pretty level through the rest of the year.

Bill Chappell — Truist Securities — Analyst

Got it. And then for the margin improvement for services certainly, margin improvement overall is impressive for the quarter. But just trying to understand a lot of that had to do with the comps. The last year we were still in Omicron. We still had some absenteeism. We still had some other kind of issues. So is there other things we can look at to see that sequentially, it’s really on plan or did you really see some meaningful margin improvement, as we sequentially move to the rest of the year?

Cord Christensen — Chairman & Chief Executive Officer

Yes for sure. I think we were delivering and using the words in line with our expectations because as we said in the last couple of quarters, the first thing we did is we rightsized the P&L based on today’s economy it’s working. We’re seeing that flow through the numbers. Yes, we saw a significant improvement over last year but you’ve just had a very low comp on margin due to lots of things coming out of COVID.

When you look at the rest of the year you’re going to see it be closer to prior year, but we still think over last year, for total year we should see 350 basis points of improvement just in running the business better, healing of cancellation rates and other things that are really driving the business. But again, we’ve got very disciplined operators right now running the P&L properly. And when that P&Ls run properly with the right discipline, it can return to these type of numbers. But yes, it was a significant improvement, almost 1000 basis points or more than 1000 basis points of improvement over prior year.

Bill Chappell — Truist Securities — Analyst

And I might have missed but was there a difference in terms of mobile clinics that you’re running versus even the fourth quarter of last year?

Cord Christensen — Chairman & Chief Executive Officer

John do you have the exact number? I don’t have that right in front of me. I know cancellation rates are the best they’ve ever been in our veterinarian pool for the mobile clinics is the best it’s been since 2019 or comparable to 2019, which is a lot of the hills.

But again I think we’ve been running kind of on a run rate of similar to the number of clinics the prior year and have not ramped that yet. We’ll start looking to ramp it further. But John if you’re on you can comment.

John Pearson — Senior Vice President, Head, Services Division

Yes, we did 22,000 clinics, so that breaks up between community clinics. We did 13,300 and wellness centers, 9,000 versus last we did 20,493, so increase of just over 2,000 — or just less than 2,000 clinics.

Bill Chappell — Truist Securities — Analyst

That’s great. Thanks for the color.

Cord Christensen — Chairman & Chief Executive Officer

Thanks Bill.

Operator

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

Corey Grady — Jefferies — Analyst

Hi, thanks for taking my questions. So, in the press release you mentioned continued trade down. Can you add more color on what you’re seeing in terms of consumer behavior? I think last year you saw both consumers trading down to lower tier and sticking with premium but buying smaller pack sizes. So, curious what you’re seeing at this point and how that plays into your outlook for the year? Thanks.

Cord Christensen — Chairman & Chief Executive Officer

Michael do you want to go ahead and take that?

Michael Smith — President & Chief Operating Officer

Sure. Those same trends from a trade-down perspective are maintaining in the category this year as we start to anniversary some of the time frames of last year when we saw some of that behavior. One of the things that is bouncing back a bit is the pack size transition. We are seeing consumers trade back up in pack size if you will.

So, even though they’ve gone to a new brand and decided to stay there they are now looking at the overall value of that brand proposition and going back into some of those larger pack sizes across the category.

Corey Grady — Jefferies — Analyst

Got it. That’s helpful. Thank you. And then last quarter you talked about a services test concept. You’re running with an expanded menu of services. Can you maybe talk about how those pilots are performing and any additional initial learnings? Thanks.

Cord Christensen — Chairman & Chief Executive Officer

Yes, thanks for the question. Yes, we’ve now expanded to where we have I believe John three locations the fourth one opening shortly, two have been open for a period of time. They are performing at our expectations. And it’s very simple. We have a menu of services that are done that don’t require the veterinarian to be present and allow us to service really those things that people may be doing their pets every single month.

So, instead of the vet services that are 1.2 times a year, it’s more of an annualized kind of monthly thing heavily weighted towards the subscription plan that builds over time. The subscription program is on track as far as how we would see it building. Our intention is to continue to test those existing locations add more to it through the rest of the year to try and perfect the P&L.

But right now we’re very pleased that we have these additional revenue opportunities that are very close to our average ticket but allow a frequency that is significantly more often which any time you can add a service that’s similar in size that from a ticket perspective but can be there 10 to 12 times a year versus 1.2 times, it’s a win.

So, so far, we’re feeling very good about it. We’re not declaring victory, but feel very good about the revised kind of outlook on and approach to just doing more to help people take better care of their pets and more frequently.

Corey Grady — Jefferies — Analyst

Thank you.

Operator

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

Jon Andersen — William Blair — Analyst

Thanks for the follow-up. I want — on Rocco and Roxie, can you remind me like how much of that business is in the e-commerce channel today? And how much is through an individual or a couple of SKUs? You mentioned concentration. I’m just trying to get a better sense for that concentration by product and channel. And in the context of what opportunities that offers you to kind of expand that and broaden the reach of that business?

Cord Christensen — Chairman & Chief Executive Officer

Thanks for the question, Jon. Michael, go ahead please.

Michael Smith — President & Chief Operating Officer

Yeah. On the aggregate, the e-com business for R&R is greater than 80% of the net sales. And within that, I’d say greater than 70% is the stain and odor business which is predominantly a two SKU business. There are other offerings. But those two SKUs are the hero SKUs, that’s what the brand launched with over time has been expanded into other segments and we’re continuing on that journey of taking those brands — or taking that brand, finding new categories that resonate with consumers. And again, we mentioned earlier supplements is one that we’ve recently explored and been happy with the traction.

Jon Andersen — William Blair — Analyst

And are you able to produce or do you produce those products in-house? How are the products made today? And will that change in the future?

Cord Christensen — Chairman & Chief Executive Officer

Yeah. I think Jon currently they’re made with contract manufacturers. Rocco and Roxie did not have their own manufacturing. None of the items that they currently sell are things that we couldn’t produce. Right now, we have a lot of other things going to where the benefit from those may not be the top of our list and from a priority standpoint and adding new SKUs and adding points of distribution and adding other things of Rocco and Roxie would create better benefit. But there’s no doubt we’re analyzing it and looking at it to see if there’s a reason to do it, but there’s not anything we couldn’t produce and generate an additional synergy for the business if we chose to do that at some point. But right now we are not intending to do anything different right now.

Jon Andersen — William Blair — Analyst

Okay. Thanks so much. Good luck.

Cord Christensen — Chairman & Chief Executive Officer

Thanks, Jon.

Operator

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

John Lawrence — Benchmark — Analyst

Hi, Cord, good afternoon.

Cord Christensen — Chairman & Chief Executive Officer

Hi, John.

John Lawrence — Benchmark — Analyst

Yeah, Cord, would you talk a little bit about you mentioned the Services business a little bit and just dig into that a little further the absentee rates. What do you really think is happening on that side of the business? And I know every part you can get down it’s a lot more profitable. Can you speak to that just a little deeper dive there? Thanks.

Cord Christensen — Chairman & Chief Executive Officer

Yeah. I think in general we’re still challenged at hiring veterinarians in the market. It’s still difficult to attract and hire vets. It’s difficult for everybody. That’s a common piece of knowledge that’s out in the market. The community clinic business as you know is supported by 1099 vets looking to add shifts and extra work and we’re now well above 3000 vets in that pool which is consistent with what we were at our peak in 2019. Based on that pool being of that size that’s now bidding for those ships, our cancellation rates are now in the single-digits and we’ve seen improvement every quarter from that.

So we had our best kind of improvements between January and now. And so any time you can run more shifts to less cancellation you’re going to see improved margins and profits. And so we see that part of the business held extremely well. So we’re a company that’s very good at moving veterinary labor around to where the demand is for pets to be treated. We continue to evaluate how we continue to do that in a way that when the vet labor is there we have the maximum number of vets to see to create the spread and return that we deserve to have as a company and for our shareholders.

And I think we’re looking at a lot of things as we look at the model look at the market look at what’s going on. But we feel really good about the improvement that’s coming through and we feel even better about the team that’s executing that business on behalf of the company and on behalf of the shareholders.

So, the change and step change in how we look at our P&L, our performance and now that we measure success is definitely something that you’re seeing flow through now in the margin creation and in the contribution to the company’s performance. So, lots of good work being done. It’s still an area where we see tons of upside. The consumers love what we do. We’re helping to save money. It’s more convenient for them. And now, we’re just adding some additional analytics and execution discipline to figure out the best way to bring that needed service to the market.

John Lawrence — Benchmark — Analyst

Great. Thanks. And just a follow-up. I mean, obviously, this recent performance as you said you’re doing the case work and all of the work to study that. Obviously, with the retailer, this improved performance probably helps that growth profile as you look at that business case going forward.

Cord Christensen — Chairman & Chief Executive Officer

Yes. I mean, we’ve never had an issue with the retailers. They’ve always been happy with us and with our performance. We stay very close to them from a communication perspective on what’s happening with the company, how the business is performing, what we’re doing. So, there’s no surprises. The reality of it is, we have great relations with all of them, but they all want more. I mean, they love what we do. They love the traffic it builds. They love the conversion it creates, the new purchases of pet products in our stores. And so, the pressure is always just them us everybody wants more. And so we’re figuring out models that will allow us to do that.

So the base business that we started from has I would call back to a 95% healed place and now we just need to increase the number of clinics that were running that base business. The wellness center and some of the reimagination that John’s team working on is making substantial progress. We’re very excited about it, probably the most energized we’ve been in a very long time. And we’re very close to being able to sit down and have more of a meaningful conversation, where we can show people what we’re doing, how we’re thinking about it and where we go forward with it. But yes, I think we’ve had enough time now with COVID and the pause to look at what goes on, how it goes on and how our company is positioned to strategically be better and different than most. So, we’re in a good spot.

John Lawrence — Benchmark — Analyst

Great. Thanks. Good luck.

Cord Christensen — Chairman & Chief Executive Officer

Yes.

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 — Chairman & Chief Executive Officer

Again, just thank you for joining us today. We’re extremely pleased with our ability to deliver sales and adjusted EBITDA above the guidance that we provided and we’re very happy with the execution we received from all of our employees across the company to do that and our retail partners and partnerships that have continued to be loyal and help us take our mission forward of helping people save money on their basic health care needs for their pets. So, thanks for joining us. We look forward to talking to you again in a few months on the next quarter, as we continue to be optimistic about our ability to deliver the full year and deliver the subsequent quarter. So, thanks for joining us everybody. We’ll talk to you soon.

Operator

[Operator Closing Remarks]