PetIQ, Inc. (PETQ) Q4 2020 Earnings Call Transcript

PetIQ, Inc. (NASDAQ: PETQ) Q4 2020 earnings call dated Feb. 25, 2021

Conference Participants:

Katie Turner — Investor Relations – ICR

McCord Christensen — Chief Executive Officer and Chairman of the Board

Susan Sholtis — President

John Newland — Chief Financial Officer and Corporate Secretary

Analysts:

David Westenberg — Guggenheim Securities — Analyst

Joseph Altobello — Raymond James Financial, Inc — Analyst

Jon Andersen — William Blair & Company — Analyst

William Chappell — Truist Securities — Analyst

Stephanie Wissink — Jefferies LLC — Analyst

Brian Nagel — Oppenheimer & Co. — Analyst

Presentation:

Operator

Thank you for standing by. This is the conference operator. Welcome to the PetIQ Fourth Quarter and Full Year 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded.

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

Katie Turner — Investor Relations – ICR

Good afternoon and thank you for joining us on PetIQ’s fourth quarter and full year 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 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, including adjusted gross profit, adjusted SG&A, 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 posted a supplemental presentation on its website for reference.

And now I’d like to turn the call over to Cord Christensen.

McCord Christensen — Chief Executive Officer and Chairman of the Board

Thank you, Katie, and good afternoon everyone. We appreciate you joining us today to discuss our fourth quarter and full year 2020 financial results. Today, I will begin with an overview of our strategic business and financial highlights and Susan will provide greater detail on our services segment and John will discuss and review our financial results. Finally, Susan, John and I will be available to answer your questions.

In 2020, the diversification of our business model and the complementary nature of how we connected pet parents across our products and services segment has never been more evident. We generated record fourth quarter and full year net sales of $164.2 million and $780.1 million respectively. And full year consolidated adjusted gross margin improved 130 basis points to 19.6% and adjusted EBITDA of $67.8 million, increased nearly 12%. This is impressive considering we operated much of the year with our wellness centers and community clinics temporarily closed due to COVID-19. While we started to reopen in small number of our locations in May, we still had certain regions, for example, in California, where our clinics and wellness centers were not reopened until early in the fourth quarter, based on local and state regulations and restrictions.

We continue to operate across our entire organization with our number one priority be in the safety and health of our employees. Our team has done a tremendous job to execute on our strategic objectives. Their agility and collaboration have helped to serve our retail and e-commerce partners. Together, we’ve experienced changing consumer purchasing habits that have meant, we needed to be flexible to ensure we are serving pet parents and their pets where and when they needed to fulfill their pet health and wellness needs.

The financial strength that our product segment provides for a broader business is an important component of the resilient nature of PetIQ. The product segment fueled our financial results in the fourth quarter and for the year. This helped to reduce some of the financial impacts from our services segment. As we discussed on previous calls this year and the middle of the year during Q2 and Q3, in particular, we experienced fluctuations in our business related to COVID-19, resulting in episodic surges in demand for our products business. At times, this made our quarterly year-over-year comparisons less indicative than our year-to-date comparisons when measuring the strength and momentum of our underlying business trends.

Importantly, what has not changed are robust industry tailwinds including the humanization of pets and continued significant growth in our categories as pet parents are taking better care of their pet health and wellness needs. These tailwinds are demonstrated by our annual products segment net sales increase of 17.6% year-over-year to $725.7 million and adjusted EBITDA margin increased 440 basis points from Q4 last year to 17.1%. Our products business outperformed our original expectations for the year despite any COVID-19 related volatility.

Taking a closer look at our product segment for the fourth quarter, sales were led by our e-commerce business that was up over 42% versus Q4 last year. Our non-Rx e-commerce business was up 39% year-over-year for Q4. Our manufactured e-commerce business was up 161% including Capstar or up 95% excluding Capstar. Our products team emphasis on winning at both retail and e-commerce is paying off with product segment, distributed and manufactured product sales mix continue to improve beyond the 75%, 25% historical sales mix for the quarter and we expect to see further improvement in 2021.

Q4 marked our first full quarter of Capstar with results that continued to outperform our expectations. We have clear line of sight to conservatively achieve our stated greater than $20 million of incremental EBITDA contribution from Capstar in full year 2021. This will also drive additional product segment margin improvement in 2021. Based on our Q4 and full year 2020 results and key programs already planned for 2021, we have tremendous confidence in our future growth trajectory and business momentum.