PetIQ - Q2 2023

Transcript

Cord Christensen (CEO)

Welcome to the PetIQ Inc. Q2 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 (Managing Director of Investor Relations)

Good afternoon. Thank you for joining us on PetIQ's Q2 2023 Earnings Conference Call and Webcast. For today's prepared remarks, we'll hear from Cord Christensen, Chairman and Chief Executive Officer, and Zvi Glasman, Chief Financial Officer. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements.

Please refer to the company's annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, on today's call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's release for a reconciliation of non-GAAP financial measures, the most comparable measures prepared in accordance with GAAP. In addition, PetIQ has posted a supplemental presentation on its website for reference. With that, I'd like to turn the call over to Cord Christensen.

Cord Christensen (CEO)

Thank you, Katie. Good afternoon, everyone. We appreciate you joining us today to discuss our record Q2 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, John, and I will be available to answer your questions. Our team did an excellent job during the Q2, executing our operational and strategic growth initiatives. Their hard work and dedication across both our products and services segment enable us to report record net sales and adjusted EBITDA, both of which exceed our expectations for the Q2 of 2023. As a result of our better-than-expected Q2 and year-to-date results, we are pleased to be able to raise our full year 2023 outlook.

A few key highlights from the Q2 include: we reported net sales of $314.5 million, an increase of approximately 25%. The net sales result was above our Q2 outlook of $270 to 280 million. We had strong, broad-based growth across our business, with a solid increase in gross profit dollars and improved leverage of our SG&A expenses, even with the key investments in advertising and promotional spend to support the growth of our business. This helped us achieve record quarterly adjusted EBITDA of $32.9 million, ahead of our guidance for the Q2, adjusted EBITDA of $24 to 26 million, and a 36% increase versus Q2 of 2022.

Our higher earnings and improved working capital helped us achieve Q2 record cash from operations. We reduced the company's net leverage to 3.6x as of 30 June 2023. Turning to our products segment in more detail, the product segment contributed net sales of $278.2 million, an increase of 27% compared to the prior year period. When you look at all sales channels combined, year-over-year consumption growth in the Over-the-Counter flea and tick category was the strongest that we've seen in the last 36 months during the Q2 of 2023, at a positive 10.4%.

In Q2 of this year, nearly 50% of the over-the-counter flea and tick category sales were generated online, and importantly, PetIQ's portfolio of brands continued to capture a disproportionate amount of this growth and dramatically outperformed the broader category, as evidenced by our Q2 share results. Turning to our product segment in more detail, as I mentioned, our PetIQ manufactured products outperformed the broader category. The most critical category to enable our financial results is PetIQ's manufactured flea and tick business, which saw its best quarter of winning over pet parents since our acquisition of Perrigo Animal Health in 2019.

When looking at our over-the-counter flea and tick brands, growth in all sales channels for the 12 weeks ended 17 June 2023, our portfolio of OTC flea and tick brands grew a positive 15.3% versus the market's growth of a positive 10.4%, leading to a gain of a positive 46 basis points of share. These gains were driven by both our PetArmor Plus and Capstar brands. Our pet supplement segment saw accelerated consumption growth in the Q2 of 2023, as our portfolio grew a positive 19.5% as compared to the prior year. The category also continued to see significant expansion in the quarter, gaining 16.1% over the prior year period.

This fast-growing category has more than doubled over the last 4 years and has surpassed the OTC flea and tick business as the largest category we compete in within our manufactured portfolio. Strong household penetration trends, along with expanded need states in the category, gives us confidence that the broader category will continue to maintain high double-digit growth rates for many years to come. PetIQ is positioned very well to continue to gain share in this important category. In addition, our dog treat business continued to also outperform the category. This growth was led by our dental treat business via the Minties brand, which grew positive 31% and gained 47 basis points of share within the category. Another growth driver for us in the quarter was our PetLove treats brand, which expanded by a positive 23%.

The newest member of our portfolio, Rocco & Roxie, which we acquired in January of 2023, also saw double-digit growth rates. The Rocco & Roxie brands grew a positive 13.8% in the Q2, well ahead of our projections. We exited several parts of the business in the first half of 2023 that we determined were not a strategic fit for us and are pleased to still have recovered these lost sales and achieve better-than-expected growth without their sales contribution. Our core items in the premium pet stain and odor category exceeded our expectations, and we are very encouraged to see the brand begin to expand into other premium pet categories with success. This has also contributed to the share gains we are seeing within the brand. Sales of the PetIQ manufactured products increased 21.2%, ahead of our expectations.

Our own manufactured products represented 29.1% of our product segment net sales in Q2 of 2023, compared to 26.2% in Q1 of 2023. This build and run rate will continue in the back half of the year and will allow our manufactured products to achieve our sales dollar growth for 2023. We will likely be below our expectations of 32% of our product segment sales to come from the PetIQ manufactured brands in 2023, as our distributed product portfolio has significantly recovered from the prior year and is contributing above our model forecast. That said, we do continue to expect outperformance of our PetIQ manufactured product portfolio, but this will be against a larger pie of overall revenue than we previously forecasted. Now focusing on the services segment.

Our services segment reported Q2 2023 net revenue of $36.4 million, an increase of 10.2% as compared to the prior year period and ahead of our expectations. We experienced improved cancellation rates and solid operational improvements, which allowed for increases in average rent per clinic and average dog or pet served during the Q2 of 2023. We converted four wellness centers to hygiene centers in the quarter, and we will continue to test this exciting new addition to the service, services segment. Moving forward, we will remain prudent with our new location growth for the remainder of 2023. Importantly, under John Pearson's leadership, the services segment has experienced a significant improvement in the last year since he has joined.

Most recently, our services team executed regional pricing and has tested additional services centered around hygiene, with select locations already successfully increasing the number of pet visits as a result of these new services. During Q2, we also launched a new convenient virtual tool allowing pet parents to book appointments easily or walk in and know when they can see a vet or vet tech. We've been pleased with the innovation and pace of results generated from the services segment since Q2 last year and look forward to the opportunities we have ahead. Before I turn the call to Zvi, I would like to congratulate John Pearson on his promotion to Executive Vice President, Services and Manufactured Products, a newly created role effective 2 August 2023.

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

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

Zvi Glasman (CFO)

Thank you, Cord. We are very pleased with our Q2 results and the ability to raise our 2023 annual guidance based on our strong year-to-date financial results. Today, I will discuss our quarterly financials in more detail and our outlook for Q3 and the full year 2023. We reported record Q2 net sales of $314.5 million, an increase of approximately 25% compared to Q2 of last year, driven by an increase in sales from both the products and segment segments, as well as the addition of Rocco & Roxie. As Cord mentioned, we had strong, broad-based growth across all sales channels and product categories. Q2 2023 gross profit dollars increased 19.2% to $73.9 million. A shift within the mix of product segment sales to more health and wellness...

products that carry a lower margin and timing of cost increases contributed to the 23.5% gross margin in the Q2 of 2023, representing a 110 basis point decline as compared to Q2 of last year. SG&A expenses for the Q2 of 2023 were $55.2 million, compared to $50.6 million in the Q2 of the prior year. SG&A, as a percentage of net sales, decreased 250 basis points to 17.5%. Adjusted SG&A was $51.5 million for Q2 of 2023, compared to $46.1 million in Q2 of last year. As a percentage of net sales, adjusted SG&A was 16.4%, a decrease of 190 basis points compared to the prior year period.

The decrease was mainly due to continued leverage of costs and increased business expense efficiencies relative to the growth in sales for the quarter. It is worth noting that we leveraged SG&A in the quarter, while also growing our A&P investments to support the long-term health of our manufactured brands portfolios. From a profit perspective, we reported Q2 net income of $9.6 million, or EPS of $0.32. Adjusted net income for the Q2 of 2023 was $13.4 million, and adjusted EPS was $0.46, an increase of 39.4% compared to Q2 of last year. Q2 EBITDA was $29.2 million, an increase of 49.2% compared to $19.6 million in the prior year period.

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

We've been pleased with the company's cash generation in the first half of this year, and now believe we will be towards the top end of our annual free cash flow guidance range of $30 to 40 million. The company's total debt, which is comprised of its term loan, ABL, convertible debt, and capital leases, was $449.6 million as of 30 June 2023. In addition to our cash on hand, the company's revolving credit limit is undrawn and has $125 million of availability. Total liquidity, which we define as cash on hand plus debt availability, was $203.4 million as of 30 June 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 Q2 of 2023, was 3.6x versus 5.0x in the prior year period, driven by higher earnings and improved working capital. We are pleased with our ability to reduce our leverage and continue to believe net leverage at the end of 2023 will be lower than at the end of 2022. Our team remains confident that the consistent growth and contribution from the product segment, as well as the ongoing improvement in the services segment, positions the company well to drive future free cash flow and build cash in addition to opportunistically paying down our debts. Now, turning to our guidance. For the year ended 31 December 2023, we are raising the guidance.

Note, I will reference the midpoint of the guidance ranges when discussing our percentage increases in net sales and adjusted EBITDA as compared to the prior year period and compared to Q3 of 2022. This is consistent with what is presented in today's press release and earnings presentation. We now expect net sales of $1.01 to 1.05 billion, an increase of approximately 12% as compared to 2022. For adjusted EBITDA, we increased the range to $93 to 97 million, representing an increase of approximately 22% as compared to 2022. For the Q3 of 2023, we expect net sales of $220 to 240 million, an increase of approximately 10% as compared to the prior year period.

We expect adjusted EBITDA of $18 to 20 million, an increase of approximately 17% as compared to the prior year. Based on the success of our marketing initiatives year to date, our raised outlook for the remainder of the year now includes an incremental $2 million of A&P investments to benefit brand awareness and consumption in 2024 and beyond. Keep in mind that consistent with prior year periods, the Q4 of 2023 will be the lowest contribution net sales and adjusted EBITDA quarter. In addition, it is important to note that in Q4 of this year, we expect to make certain strategic investments in SG&A to support the continued growth and development of our brands and position us well for the start of next year.

Based on these items, you will see an implied lower growth rate in Q4 of this year versus the year-over-year growth expectations we have communicated today for the Q3 of 2023. In closing, we reported strong results for the Q2 and first six months of 2023, and our team remains optimistic about our opportunities for growth in 2023. At PetIQ, our team will continue to execute on our strategic initiatives to deliver value for all of our stakeholders as we execute on our mission of smarter, convenient, and affordable pet health and wellness for pet parents. That concludes my financial review. Cord, Michael, John, and I are now 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 are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would 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. Congrats on a very strong quarter. I just wanted to start out with your Q2 performance. Obviously a very strong top-line beat. It looks like you beat the high end by more than $30 million. Just curious if you can rank the sources of upside versus, you know, I guess, I guess, your guidance range.

Cord Christensen (CEO)

I think, Rupesh, it's Cord. Thanks for the question. Probably better if Michael answers it, 'cause he can talk through which categories outperformed. We saw overall consumption trends accelerate in Q2 from Q1, which is also a very strong quarter. Michael, why don't you comment on the sources of the beat?

Michael Smith (President and COO)

Yeah, Rupesh, I would say it was a very broad beat. If you look at, kind of our key categories, there's not necessarily one that massively outperformed to lead the pack, per se. They all carried a little bit of weight. Obviously, the overperformance in the flea and tick category helps not only on the top line, but also on the bottom line. We had a significant beat there versus our expectations, not only for the category, but also the amount of share that we were able to pick up in the Q2. We also had really strong results out of our supplements business, our dental treats business. We saw better than expected results from our stain and odor business under the acquisition of Rocco & Roxie. Then our distributed portfolio overperformed expectations as well. Really, each of the key segments of business had meaningful beats versus our expectations.

Rupesh Parikh (Managing Director and Senior Analyst)

Great. Then looking at Q3 guidance, it does imply a moderation on the sales line versus Q2. I know there, you know, seasonality and comparisons come into play, but just curious if, if there's maybe more conservatism for Q3 or if there's something else at play.

Cord Christensen (CEO)

Yeah, I think in general, I mean, Rupesh, we always know that Q3 and Q4, we start to see less contribution from our seasonal businesses. So we've definitely been conservative to kind of anticipate what's happening. If we continue to see consumption running the way it is, then we anticipate that we'll also have a stronger Q3 than what we've guided to. It's responsible based on what we know from historical performance on just the overall season out of the business. So we've taken into account Q3, Q4, same commentary. We know in Q4, we get less contribution from the categories that flea and tick and some of the others that are overperforming right now. So in general, we've been conservative, but we're also, again, just in a great place. Consumption's good. Pet parents have decided to take care of their pets.

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

Rupesh Parikh (Managing Director and Senior Analyst)

Great. My, my last question, just on gross margins. Mix shift did weigh on your gross margin rate during the quarter. Just curious how you think about the gross margin puts and takes for the back half of the year, and especially mix.

Zvi Glasman (CFO)

Yeah, this is the... The main thing that drove our gross margin down in the quarter was the fact that our manufactured categories performed exceptionally, but a lot of the manufacturing categories that grew faster than, grew faster were the health and wellness categories. Those categories carry a slightly lower but very healthy margin, and so that drove the margin percentage down in the quarter. We continue to expect-- It's also worth pointing out that Q2 is a bit of an anomaly. The rest of the year, we do expect to be up on a year-on-year basis for margins close to 100 bps, probably 75 to 100 bps. I think we have pretty good line of sight to margins.

The only way the margin percentages will be down is if, if some of those, you know, other categories outperform, but that would only happen probably with upsides of the total margin dollars.

Rupesh Parikh (Managing Director and Senior Analyst)

Great. Thank you. Congrats again.

Cord Christensen (CEO)

Thanks, Rupesh.

Operator (participant)

The next question comes from John Anderson with William Blair. Please go ahead.

John Anderson (Analyst)

Well, hi, thank you for the questions. I wanted to ask about the services business. I think, Cord, you mentioned 4 conversions of wellness centers to Hygiene Centers. Can you talk a little bit more about, you know, what's going on there, what your plans are for the future, what kind of performance you're seeing as you shift towards kind of the hygiene approach, and how that might play out over the next?... 12-24 months.

Cord Christensen (CEO)

Thanks, John. I think in, in general, we've talked about a lot. Obviously, we're just at your conference. The, the hygiene addition is significant for us. We're testing it, we're measuring it. We're definitely not declaring victory yet, but we're very encouraged by what it adds to the locations, because it's a list of services that drive great revenue and margin profile without needing the vet labor. We're able to really focus on what we're great at, which is our ability to move vets there when we need the vet present. We're up to 6 locations. We're definitely going through an optimization with those. We're testing, we're growing the subscription base there. We're learning, at the end of the day, it's, it's still early in our decision to expand it significantly. All indications is it's a great opportunity for us.

We think it's the right thing for the business. We need to add more revenue and margin opportunities to the box. We're excited about it. Again, I think in general, we've always said we're getting enough of a base to really test, measure, and once we declare victory, we'll let people know. Again, I think in general, we think it's the right thing for what's going on in the labor market with the vets. We think it's the right thing for PetIQ, and we're excited that we're kind of at a place where we have a broader base group of stores across a bunch of different demographics to start testing and measuring and growing across that thing.

We'll be giving you updates every quarter on how we're doing. When we declare victory, we'll let you know, but we're still early in the process. Again, very optimistic and encouraged by what we're seeing.

John Anderson (Analyst)

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

Cord Christensen (CEO)

Yeah, I think first and foremost, our community clinic model, which we've had forever, is doing extremely well. We're expanding the number of events we're holding with that. We see growth there that's significant. Margin profile, EBITDA margins, contribution is significant. From a hygiene perspective, we'll do it anywhere it makes sense to do it, all customers and all wellness centers are on the table as an option to deal with it. Again, I think we're encouraged what we're seeing. It adds a lot to the box. It's a service that people need monthly, a pet needs to be there 12x a year versus 1.2x on a vet service. The ticket's not much difference on a monthly basis, it's not hard to figure out that when it works, it's really a great contribution.

Right now, no, we've, we've kind of put all the research in, all the diligence in, and we're testing, measuring, and working towards how that would you know, potentially contribute. It's also part of all the, the general healthcare thing we're, we're committed to, which is these hygiene services help the pet, helps their healthcare, helps things work, and so we're, we're just continuing to kind of head down the path. Again, it's early, and we're not ready to declare victory yet, but we're definitely encouraged.

John Anderson (Analyst)

Okay, that's helpful. Just one more two-parter on cost. I think Zvi mentioned part of the lower gross margin rate in the quarter was was mix shift. I think that was the bigger part, but also mentioned timing of cost increases. Just was hoping to get a little bit more explanation around that and whether those are transitory or there's something else. Then, on the additional A&P investment and additional investment in the Q4, how will that be directed to, to kind of, I guess, what, what part of the business do you see the opportunity to invest more behind, as you, as you look to, you know, longer-term growth? Thanks.

John Pearson (EVP of Services and Manufactured Products)

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

Michael Smith (President and COO)

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

John Anderson (Analyst)

Great. Thanks a lot and congrats on a nice, nice quarter.

Cord Christensen (CEO)

Thanks, John.

Operator (participant)

Again, 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 (Analyst)

Thanks. Good afternoon.

Cord Christensen (CEO)

Hey, Bill.

Bill Chappell (Analyst)

Just, hey, just to follow up on, on just the overall flea and tick season. I mean, it, it seemed from the other seasonal stocks we cover, it was a, a slower start in terms of cooler, wetter, start to the spring, and, and then it, I guess, heated up. Don't know how that compares to what you were expecting, how it compares versus year-over-year, if some of this is a benefit of, of a stronger than expected season or just really an outperformance from the company?

Cord Christensen (CEO)

Michael, you want to go first? I'll kind of clean up after.

Michael Smith (President and COO)

Yeah, on flea and tick, look, it's a category that is largely, going to be tied to weather-driven demand dynamics. We are seeing conditions this year that are more favorable than the average year and definitely more favorable than last year and more favorable than we had modeled and expected. As a category, we expected to see, low to mid-single digit growth. We're seeing high single digit to low double-digit growth for the category. Then we're gaining share on top of that and outperforming the category between 300 and 400 basis points, depending upon what time frame you look at.

I would say, A, we are outperforming, and there's, there's elements of our strategy that are, you know, translating to the results that we posted. To be candid, we are also seeing a growth in the pie that we did not expect, that is also leading to kind of the double positive of the over-deliverance in that portion of our portfolio.

Cord Christensen (CEO)

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

In general, it's a good category for weather, but it's hard to measure with all the other noise that happened with the consumer. I think we're like, we've always said, we're ready to business every day, we're positioned to win, and this is a year that it's definitely kind of all come together better than we expected.

Bill Chappell (Analyst)

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

Cord Christensen (CEO)

I definitely think that for the first time, we have kind of a normalized year where we're not trying to deal with anomalies in the market and who's doing what and why and how. That's been nice to have that kind of, kind of level turns and just consumption and basic stuff. Look, weather's been good this year for our categories. The consumer is responding well. We're definitely at a place as a company where we know how to reach out, communicate, educate, and, and convert people to do things. We, we are making investments to continue that because we're able to measure that ROI and understand how it pays dividends.

I think in general, we're positioned extremely well as a company, whether it's flea and tick, or health and wellness, or it's dental, or it's what the stuff we distribute, it's all working well because we're finally in a place where we're not trying to, like, apologize for something that's going on outside of the company's control. When we're in control, we have the levers, we're pulling them, they're working, and I think you'll see a great back half of the year and a great 2024.

Bill Chappell (Analyst)

Got it. I just need one follow-up.

Cord Christensen (CEO)

Yep, sure.

Michael Smith (President and COO)

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

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

Bill Chappell (Analyst)

Well, thanks so much for the color. Appreciate it.

Operator (participant)

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

John Lawrence (Analyst)

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

John Pearson (EVP of Services and Manufactured Products)

Great. Thanks, John. Yeah, when, you know, joined the team just over a year ago, you know, for me, it really goes back to the customer and what does our customer value and want most from us. When we look at our business model, it's all about convenient access to affordable care on the services side. I assessed where we were putting dollars to improve our business model. It was frankly, towards other customer value propositions that our customer hasn't and frankly, we, we haven't proven are leaning towards us for. It was really an assessment of. Where do we need to put resources to focus on the things that matter most to our customer? We've focused on, you know, improving our cancellations, getting our staffing right, finding the appropriate vets and markets where we generate the best return.

Then as we've, you know, been on this journey with the wellness center re-imagination, it's really assessing what matters to that customer as well, and is it similar to the community clinic model or different? We're excited about now the capabilities that the team has enabled through, you know, tech enablement and several other factors, to be able to have more levers to deliver the PNL and deliver what the customer cares about, which, as I mentioned, is affordable, accessible care.

John Lawrence (Analyst)

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

Cord Christensen (CEO)

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

I think you'll find, as you track the performance in our manufactured brands with the margin profile of it, we have a great base with great growth, and now one of the best times we're going into with our R&D portfolio, starting to come through all the regulatory process to be able to deliver. We're optimistic about the future. It's never a straight line up to the right, but it's always going to be up to the right with VetIQ. We'll continue just to work hard and deliver those type of results. This is a quarter we're excited about, as we've been able to leverage all aspects of the business, services, manufactured, distributed.

Everything has done a really good job, as we've seen pet parents get excited about giving back and just taking care of the pets, and I think it's indicative of where people prioritize, where they are going to take care of the things in our personal lives. We've had a great quarter. We've had a great year to date. Obviously, we raised guidance significantly for the rest of the year, and I think we're also still being conservative for the back half. Yeah, it's been a great quarter, John.

John Lawrence (Analyst)

Great. Thanks. Good luck.

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 (CEO)

Just like to thank everyone that's been, on the call and with us through the last few years. It's, it's been great to finally be at a place where we're able to operate in an environment where the consumer, the market, there's not a lot of different anomalies. The retailers aren't having inventory issues, and I think you can see how the company can perform when we can have a stabilized market. It's been a great year. Our employees have done an amazing job across all aspects of the business. We appreciate everyone that's, with us and stuck with us and been here for us as we continue to grow, as we've continued through thick and thin, to deliver great results.

2023 has been a great year for the company, a great year for pet parents, and definitely a great year for PetIQ to continue to offer value and convenience for all pet parents across the country. Thanks for being with us, and we look forward to spending time with you.

Operator (participant)

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