PetIQ - Q1 2023
May 9, 2023
Transcript
Cord Christensen (Chairman and CEO)
Good day, and welcome to the PetIQ, Inc. First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, please press Star then two. 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 (Head of 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 Glassman, 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, the most comparable measures prepared in accordance with GAAP. In addition, PetIQ posted a supplemental presentation on its website for reference. With that, I'd like to turn the call over to Cord Christensen.
Cord Christensen (Chairman and CEO)
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. This 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 complimentary strategic acquisition of Rocco & Roxie on January 13th for $26.5 million in cash. As we discussed on our call last quarter, Rocco & 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 & 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 product 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 18-24 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. Importantly, PetIQ's portfolio of brands continued 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 veterinary products and services, has never been more valuable and needed by pet parents. Turning to our product 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, which 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 remove 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 the first quarter of 6.5% as compared to the prior year period.
This slower 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 +22% and gained 36 basis points of share within the category.
Dog treats increased 157%, driven by our Pur Luv brand, overall consumption across all of PetIQ branded offerings and across all retail channels grew +10.4% for the 12 weeks ended March 25, 2023. PetIQ manufactured products represented 26.2% of our product segment net sales in Q1 2023, compared to 28.4% in Q1 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. For 2023, we continue to expect to achieve our stated objective of having greater than 32% of product segment net sales from PetIQ manufactured products. Focusing on the services segment.
Our services 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 achieve 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 products 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. 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. Our teams consistently focus on the controllable aspects of our business, 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 distribution facilities as well as our corporate offices for the commitment to our mission and core values in helping us to achieve these financial results. With that overview, I'd like to now turn the call over to Zvi.
Zvi Glasman (CFO)
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 2022 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 our higher mix of distributed products 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 product 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. 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 was $43.3 million for the first quarter ended March 31, 2023. Compared to $45.4 million using 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 & 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 & 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 product 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, we 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 websites.
For the second quarter of 2023, we expect net sales of $270 million-$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-$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 is 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?
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Rupesh Parikh with Oppenheimer. Please go ahead.
Rupesh Parikh (Managing Director and Senior Analyst)
Good afternoon. Thanks for taking my question. Also, congrats on a nice quarter. With the Rocco & Roxie acquisition, I was just curious how the integration is going so far and any surprises of note thus far?
Zvi Glasman (CFO)
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. 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. If you back that out, 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 that's strategic, a 20% kind of run rate base. No surprises so far. We're ahead of schedule.
Integration's gone extremely well. By the way, again, lots of white space and lots of things we think we can do to increase distribution and really make things work and grow. Michael Smith, anything you'd add based on kind of your initial retailer conversations?
Michael Smith (President and COO)
No, the only thing I would add is just some of the tests as we have moved the brand 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, you know, 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 over time. The early read on supplements is, again, better than what we initially modeled.
Rupesh Parikh (Managing Director and Senior Analyst)
Great. 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. I know at times last year, there were some retail inventory adjustments within the channel. Just curious how inventories are right now in the retail channel based on what you guys are seeing.
Cord Christensen (Chairman and CEO)
Yeah, Michael, you're the best one to answer that, so go ahead.
Michael Smith (President and COO)
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, on 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. When you wash that all out across customers and brands, we're in a, in a fairly healthy, what I'd call a neutral inventory position across the retail channel.
Rupesh Parikh (Managing Director and Senior Analyst)
Okay, great. Thank you. I'll pass it along.
Cord Christensen (Chairman and CEO)
Thanks, Rupesh.
Operator (participant)
The next question comes from Jon Andersen with William Blair. Please go ahead.
Jon Andersen (Partner and Equity Research Analyst)
Good afternoon, everybody.
Cord Christensen (Chairman and CEO)
Hey.
Jon Andersen (Partner and Equity Research Analyst)
Hey, e-commerce, I think you said, is now more than half of the OTC flea and tick business. Could you just, you know, comment on some of the, again, the trends that you're seeing there, whether you expect that to continue, you know, how big, you know, e-commerce could become, you know, as if these trends persist? How you specifically, how your business, your brands are positioned online. It sounds like they're, you know, you're performing well and taking share, but just discuss that a little bit. That would be helpful. Thanks.
Cord Christensen (Chairman and CEO)
Thanks, Jon, for the question. I'll let Michael start, and then I'll kind of clean up after he goes. Go ahead, Michael.
Michael Smith (President and COO)
Yeah, Jon, I'd hate to predict what, you know, the long-term share of e-commerce is going to be of 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 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. On the aggregate, healthy for the category, and I don't see anything slowing that down, candidly.
You know, if you look at growth rates for that channel relative to the balance of market, we're seeing 2, 3x the growth rate for e-commerce versus balance of market. For PetIQ, we are, you know, disproportionately outperforming in e-commerce for our portfolio of brands. If you go back, you know, three, four years, you would've heard us say we were behind in that space. We were not as developed in e-commerce as we wanted to be. I would say on that journey, you know, we got caught up in 2022, and in 2023 we're maybe more developed than the category as a whole. For us, it's definitely an engine for growth.
Some of that's due to, you know, making meaningful investments and ensuring that we're winning in that environment and learning how to better utilize those investments over time. 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 and CEO)
I think I would add to that, Jon, is, you know, 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. That focus is, you know, clearly translating into our sales and our growth rates being better online and our brands performing better than what other brands are performing. We're happy with it. We're gonna continue to invest there, and we see our brands continuing to expand and take share as we keep that focus on it.
Jon Andersen (Partner and Equity Research Analyst)
That's helpful. Thanks to both of you. One follow-up. On the manufactured business, that came in, I guess, at least as a proportion of your products business below your expectations, quarter. It sounds like there were some kind of one-time factors driving that. If anything changed with respect to your view on the manufactured side of the business growth rates? When you think about that part of your business, do you see more opportunity on the health and wellness or on the wellness side or more opportunity on the flea and tick side, or is it kind of, you know, both aspects? Thanks.
Cord Christensen (Chairman and CEO)
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 we've said that for many quarters, that that's an area of focus for us. We have white space in different form factors and different brands and different things on the flea and tick side as well. I think we're, you know, 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. Anything else you'd add, Michael?
Michael Smith (President and COO)
You know, I would just add that the way that you're looking at that data is from a ships out perspective. 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 manufacturer side of the portfolio that occurred in Q1 last year. Sometimes better to look at consumption. If you look at consumption, you'll see our manufactured brands outperforming our distributed brands. When you think of share of ships, it's gonna look one way. A lot of that's about the base. When you look at share of consumption and the health of our manufactured portfolio, consumption is probably a better way to cast that light.
Cord Christensen (Chairman and CEO)
Yeah. 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. We were, you know, 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. The consumption numbers, not the shipments, 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 (Partner and Equity Research Analyst)
Sure. Okay. Is Zvi on? I have a question for Zvi, if he's on.
Cord Christensen (Chairman and CEO)
Oh, yes.
Zvi Glasman (CFO)
I am, Jon. What's the question?
Jon Andersen (Partner and Equity Research Analyst)
Good. Just wanted to pull you in. Free cash flow for the year. You kind of inflected last year and delivered strong free cash. What's the plan for free cash on a full year basis this year? 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, you know, priorities in there as well? Thanks.
Zvi Glasman (CFO)
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 the debt will come down about a quarter of a turn 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.
Of course, if we get any great strategic acquisitions like we've done this year, we believe in R&R with Rocco & Roxie and some of the past acquisitions, those are always gonna be priorities for us as well.
Operator (participant)
If you have a question, please press star then one. The next question comes from Bill Chappell with Truist Securities. Please go ahead.
Bill Chappell (Managing Director)
Thanks. Good afternoon.
Michael Smith (President and COO)
Hey, Bill.
Bill Chappell (Managing Director)
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 over-correct, or do you expect it to be well above or be above 32% for all three of the next quarters?
Cord Christensen (Chairman and CEO)
I think Q1... Q1 was kind of an anomaly. We expected it to be a little bit lumpy for Q1. Again, there was some, you know, distributed brands that got restocked heavily at the end of the quarter that skewed it slightly. Q1 is always our lowest quarter for our manufacturer brands, and the consumption numbers really tell the story. As far as, you know, it's leveling out, I think it'll be very evident, you know, through the rest of the year that we're on track. Right now, consumption numbers are good. We need to see how consumption is as we get in some of the bigger months. You know, May is a big month, June, July is a big month. 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 (Managing Director)
Got it. Then for the margin improvement for services, certainly, margin improvement overall is impressive of the quarter. Just trying to understand, a lot of that has to do with the comps. Last year, we were still in Omicron. We still had some absenteeism. We still had some other kind of issues. You know, is there other things we can look at to see that sequentially it's really on plan or that you're, you know, really see some meaningful margin improvement as we sequentially move through the rest of the year?
Cord Christensen (Chairman and CEO)
Yeah, for sure. I think, you know, we were deliberate in using the words in line with our expectations because as we've said in the last couple of quarters, you know, the first thing we did is we right-sized 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 just had a, you know, 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 gonna see it be closer to prior year. We still think over last year for total year, we should see, you know, 350 basis points of improvement just in running the business better, healing of cancellation rates and other things that are really driving the business.
Again, we've got very disciplined operators right now running the P&L properly. When that P&L is run properly with the right discipline, it can return to these type of numbers. Yes, it was a significant improvement, almost 1,000 basis points or, well, more than 1,000 basis points of improvement over prior year.
Bill Chappell (Managing Director)
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 and CEO)
You know, Jon, 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, and our veterinarian pool for the mobile clinics is the best it's been since 2019 or comparable to 2019, which is a lot of it heals. 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. You know, Jon, if you're on, you can comment.
Jon Andersen (Partner and Equity Research Analyst)
Yeah, we did, 22,000 clinics, so that breaks up between, community clinics, we did 13,300, and wellness centers 9,000, versus last year we did 20,493. Increase of, just less than 2,000 clinics.
Bill Chappell (Managing Director)
That's great. Thanks for the color.
Michael Smith (President and COO)
Thanks, Bill.
Operator (participant)
The next question comes from Corey Grady with Jefferies. Please go ahead.
Corey Grady (Equity Analyst)
Hi. Thanks for taking my questions. 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. Curious what you're seeing at this point and how that plays into your outlook for the year. Thanks.
Cord Christensen (Chairman and CEO)
Great. Michael, do you wanna go ahead and take that?
Michael Smith (President and COO)
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 (Equity Analyst)
Got it. That's helpful. Thank you. 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, you know, any additional or, you know, initial learnings? Thanks.
Cord Christensen (Chairman and CEO)
Thanks for the question. We've now expanded to where we have, I believe, Jon, 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 need to be doing with their pets every single month. Instead of, you know, the vet services that are 1.2x a year, it's more of a, you know, annualized kind of monthly thing, heavily weighted toward 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. Right now, we're very pleased that we have these additional revenue opportunities that are very close to our average ticket that allow a frequency that is, you know, 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, you know, 10x-12x a year versus 1.2x, it's a win. So far, you know, we're feeling very good about it. We're not declaring victory, but feel very good about the revised kind of outlook and approach to just doing more to help people take better care of their pets more frequently.
Corey Grady (Equity Analyst)
Thank you.
Operator (participant)
Again, if you have a question, please press star then one. We have a follow-up from Jon Andersen with William Blair. Please go ahead.
Jon Andersen (Partner and Equity Research Analyst)
Thanks for the follow-up. On Rocco & Roxie, can you remind me, like how much of that business is in the e-commerce channel today, and how much is through, you know, 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 that offers you to kind of expand that and broaden the reach of that business.
Cord Christensen (Chairman and CEO)
Thanks for the question, Jon. Michael, go ahead, please.
Michael Smith (President and COO)
Yeah. On the aggregate, the e-com business for R&R is greater than 80% of the net sales. 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. Again, we mentioned earlier, supplements is one that we've recently explored and been happy with the traction.
Jon Andersen (Partner and Equity Research Analyst)
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 and CEO)
Yeah, I think, Jon, you know, currently they're made with contract manufacturers. Rocco & Roxie does 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. Adding new SKUs and adding points of distribution and adding other things to Rocco & Roxie would create better benefit. There's no doubt we're analyzing it and looking at it to see if there's a reason to do it. There's not anything we couldn't produce and generate a additional synergy for the business if we chose to do that at some point. Right now, we are not intending to do anything different right now.
Jon Andersen (Partner and Equity Research Analyst)
Okay, thanks so much. Good luck.
Cord Christensen (Chairman and CEO)
Thanks, Jon.
Operator (participant)
We have a question from John Lawrence with Benchmark. Please go ahead.
John Lawrence (Senior Equity Analyst)
Hey, Cord. Good afternoon.
Cord Christensen (Chairman and CEO)
Hey, John.
John Lawrence (Senior Equity Analyst)
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? I know You 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 and CEO)
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 1,099 vets looking to add shifts and extra work, and we're now well above 3,000 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 shifts, our cancellation rates are now in the single digits, and we've seen improvement every quarter from that. We had our best kind of improvements between January and now.
Anytime you can run more shifts with less cancellation, you're gonna see improved margins and profits. We see that part of the business healed extremely well. So, we're a company that's very good at moving veterinarian 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 pets to see to create the spread and return that we deserve to have as a company and for our shareholders. 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.
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. The change and step change in how we look at our P&L, our performance, and how do 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. 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 people save money. It's more convenient for them. 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 (Senior Equity Analyst)
Great. Thanks. Just to follow up, I mean, obviously, this recent performance, as you said, you're doing the casework 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 and CEO)
Yeah. 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 their stores. It's, you know, the pressure is always just them, us, everybody wants more. We're figuring out models that will allow us to do that.
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 we're running that base business. The wellness center and some of the, you know, re-imagination that Jon'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. You know, 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. Yeah, 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's positioned to strategically be better and different than most.
We're in a good spot.
John Lawrence (Senior Equity Analyst)
Great. Thanks, good luck.
Cord Christensen (Chairman and CEO)
Yep.
Operator (participant)
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 and CEO)
Again, just thank you for joining us today. We're extremely pleased with our ability to deliver sales and adjusted EBITDA above with the guidance that we provided. 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 healthcare needs for their pets. 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 quarters. Thanks for joining us, everybody. We'll talk to you soon.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.