PetIQ, Inc. Reports Record First Quarter 2020 Financial Results

First Quarter 2020 Net Sales Increased 26% Year-Over-Year to $186.8 Million

Provides Business Update on COVID-19

EAGLE, Idaho – May 7, 2020 – PetIQ, Inc. (“PetIQ” or the “Company”) (Nasdaq: PETQ), a leading pet medication and wellness company, today reported financial results for the first quarter ended March 31, 2020.

“The world changed in March 2020 when the global COVID-19 pandemic took over our lives.  While our immediate priority is focusing on the safety of our employees, partners, pet parents, and their pets, our mission of providing convenient access to affordable pet health care has never been more important.  Our consistent customer execution demonstrates how strategic PetIQ is to the broader pet healthcare market,” commented Cord Christensen, PetIQ’s Chairman and Chief Executive Officer. 

Christensen continued, “In early March as the pandemic accelerated, we experienced a steep decline in traffic and started closing wellness centers and clinics on March 14, 2020.  We then made the strategic decision to temporarily close all of our clinics on March 20, 2020 to ensure the safety of our team and do our part to slow the spread of COVID-19 in the communities we serve.  Despite these temporary closures, our diversified business model has shielded us from more severe financial impacts, and enabled us to deliver a record first quarter.  In fact, our products segment realized a significant acceleration in year-over-year growth during March, which has further accelerated in the second quarter.  During this time of uncertainty, PetIQ continues to provide reliable access to over 1,700 pet health care items across all sales channels including both brick-and-mortar and online.   We look forward to beginning to re-open our clinics at the end of this week in certain markets for pet parents to have the convenient and affordable access to pet medications and services.”

First Quarter 2020 Highlights Compared to Prior Year Period

COVID-19 Summary

First Quarter 2020 Financial Results

Net sales increased 25.8% to $186.8 million for the first quarter of 2020, compared to $148.4 million for the same period in the prior year. Product segment sales were $166.3 million and Services segment revenues were $20.5 million in the first quarter of 2020. The increase in consolidated net sales primarily reflects growth in existing retail partners and sales contribution from the recent Perrigo Animal Health acquisition, with an emphasis on the Company’s prescription drug program with e-commerce partners due to the stay-at-home orders that have changed consumer shopping habits. The temporary suspension of the Company’s service operations effective on March 20, 2020 partially offset this growth.

Gross profit was $32.2 million, an increase of 30.0% compared to $24.7 million in the prior year period. Gross margin for the quarter was 17.2% and was negatively impacted by the reduction in service revenue in March due to the COVID-19 pandemic. Adjusted gross profit was $35.6 million and adjusted gross margin was 19.3% for the first quarter 2020.  The GAAP gross margin to adjusted gross margin difference of 210 basis points is a result of the exclusion of Services segment non-same-store contribution.

Net loss was $2.6 million, compared to net income of $2.3 million.  The change includes $2.8 million of incremental interest expense, relating to the financing of the Perrigo Animal Health acquisition that closed in July 2019, $1.9 million net change in non-recurring expenses, comprised of $0.5 million integration costs, $0.7 million of clinic launch expenses, and a $0.7 million fair value adjustment to a contingent note in the first quarter of 2019. Net income also included $4.2 million of net non-same store loss contribution.

Adjusted net income was $4.6 million for the first quarter of 2020 compared to $6.0 million of adjusted net income in the prior year period. 

First quarter adjusted EBITDA increased 33.0% to $14.5 million compared to $10.9 million for the same period in the prior year.  Adjusted EBITDA margin increased 40 basis points to 7.7% compared to 7.3% in the prior year period.

Adjusted gross profit, adjusted net income and adjusted EBITDA are non-GAAP financial measures.  The Company believes these non-GAAP financial measures provide investors with additional insight into the way management views reportable segment operations in light of changes in the Company’s operations, including the increase of manufacturing operations as a result of the Perrigo Animal Health Acquisition in the Products segment and the growth of the Company’s wellness centers, host partners, and regions within the Services segment.  See “Non-GAAP Measures” for a definition of these measures and the financial tables that accompany this release for a reconciliation to the most comparable GAAP measure.

Segment Results

Products: 

For the first quarter of 2020, Product segment net sales increased 31.9% to $166.3 million. Product adjusted EBITDA increased 79.1% to $24.3 million.  This compares to Product segment sales and adjusted EBITDA of $126.1 million and $13.6 million, respectively, for the first quarter of 2019. 

The Company immediately implemented its pandemic response protocols across the organization and as a result has minimized any plant shut-downs.  In fact, all manufacturing and distribution facilities are fully operational and have maintained production and fill rates in excess of 99% since the onset of COVID-19.  The Company has paid incentives to its manufacturing and distribution work force and designed and implemented safety and cleaning protocols in all facilities to minimize exposure and protect team members.  

Services:

For the first quarter of 2020, Services segment net revenues decreased 8.3% to $20.5 million compared to $22.4 million in the same period last year.  Services adjusted EBITDA of $2.0 million compares to $5.3 million in the first quarter of 2019.  As a result of the COVID-19 related customer traffic slowdown and temporary closure of service operations effective March 20, 2020 revenues declined for the quarter. 

Services same store revenue decreased 12.6% in the first quarter ended March 31, 2020.  Non-same store revenue increased 50.5% to $2.3 million for the three months ended March 31, 2020. Non-same store growth is a result of opening additional wellness centers, as well as clinics opened in the prior year maturing, before moving into the same-store sales base.  Wellness centers, host partners and regional offices with less than six trailing quarters of operating results are excluded from the same store sales base.

Prior to COVID-19, the Company was experiencing double-digit growth in pet counts and average ticket at all wellness centers and clinics.  The estimated first quarter Services segment impact from COVID-19 was in excess of $5.0 million of revenue, in excess of 1,200 basis points of segment gross margin, and approximately $3.2 million to consolidated adjusted EBITDA.  The Company anticipates that the immediate impact to its cost structure was more significant in March following the closure of the service operations than it will be in in the second quarter due to the reduction in variable costs following the closures.  The variable costs associated with the clinic operations are approximately 80% of the segment’s cost structure, and those variable expenses were significantly reduced and will be in effect until operations restart.  This dynamic is minimizing the financial burden near-term, while ensuring that the services operations are ready to emerge stronger upon re-opening.  During the temporary closure, the organization remains in touch with its more than one million pet parent customers and is utilizing its resources to expedite the launch of a very meaningful telemedicine platform to meet their needs during this disruption and as an on-going offering moving forward.

The Company was on track to grand open 27 veterinary wellness centers in the first quarter of 2020.  However, those wellness center openings are now postponed due to the COVID-19 outbreak and subsequent decision to suspend service operations. In support of its veterinarian wellness center expansion, the Company operated 37 regional offices as of March 31, 2020.

Balance Sheet

As of March 31, 2020, the Company had cash and cash equivalents of $28.1 million. As previously announced, the Company proactively utilized its Revolving Credit Facility as a precautionary measure to provide financial flexibility given seasonal working capital needs and the growing uncertainty in the marketplace as a result of COVID-19.  The Company’s long-term debt balance, which is largely comprised of its revolving credit facility and term loan, was $325.4 million as of March 31, 2020.  The Company had total liquidity of approximately $53.8 million, and an additional $15 million available via an accordion feature of the credit agreement for a total of $68.8 million.

From a working capital perspective, accounts receivable increased $60.2 million and inventory increased $39.1 million compared to December 31, 2019, which reflects the seasonal peak in inventory and higher receivables balances due to the mix shift toward distributed products during the quarter. 

COVID-19 Update & Full Year Guidance

The Company previously provided its full year 2020 guidance on March 10, 2020, which did not include the impact of COVID-19. Despite first quarter results that exceeded Company expectations, the Company is suspending its 2020 annual guidance due to the rapidly, evolving situation and the high degree of uncertainty caused by the COVID-19 pandemic. The Company’s Products segment continues to be fully operational and is generating a further acceleration in sales to start the second quarter from the end of the first quarter of 2020, however, the Company does not believe that it can estimate the full financial impacts of the pandemic with reasonable accuracy on its Services Segment. The Company believes it has sufficient liquidity to satisfy its cash needs, as supported by cash on hand, cash flow from operations and access to its revolving credit facility. Long-term, the Company remains confident in achieving its strategic and financial objectives.

Capstar® Acquisition

As previously announced, on January 13, 2020 PetIQ entered into a definitive agreement under which PetIQ will acquire Capstar, the #1 oral over-the-counter ("OTC") flea treatment product in the United States, from Elanco Animal Health, Inc. ("Elanco"). The Company continues to expect the closing of the transaction to occur upon approval of the acquisition under a consent order issued by the U.S. Federal Trade Commission.  The Company currently anticipates this approval to be received by the end of second quarter 2020, with closing anticipated early in the third quarter of 2020.  .

Conference Call and Webcast

The Company will host a conference call with members of the executive management team to discuss these results with additional comments and details. The conference call is scheduled to begin at 4:30 p.m. ET on Thursday, May 7, 2020. To participate on the live call listeners in North America may dial 877-300-8521 and international listeners may dial 412-317-6026

In addition, the call will be broadcast live over the Internet hosted at the “Investors” section of the Company's website at www.PetIQ.com. A telephonic playback will be available through May 28, 2020. North American listeners may dial 844-512-2921 and international listeners may dial 412-317-6671 the passcode is 10142817.

About PetIQ

PetIQ is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services.  The company engages with customers through more than 60,000 points of distribution across retail and e-commerce channels with its branded distributed medications, which is further supported by its own world-class medications manufacturing facility in Omaha, Nebraska.  The company’s national service platform, VIP Petcare, operates in over 3,400 retail partner locations in 41 states providing cost effective and convenient veterinary wellness services.  PetIQ believes that pets are an important part of the family and deserve the best products and care we can give them.

Forward Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, such as

statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could" and similar expressions.  Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, the impact of COVID-19 on our business and the global economy; our ability to successfully grow our business through acquisitions; our dependency on a limited number of customers; our ability to implement our growth strategy effectively; disruptions in our manufacturing and distribution chains; competition from veterinarians and others in our industry; reputational damage to our brands; economic trends and spending on pets; the effectiveness of our marketing and trade promotion programs; recalls or withdrawals of our products or product liability claims; our ability to manage our manufacturing and supply chain effectively; disruptions in our manufacturing and distribution chains; our ability to introduce new products and improve existing products; our failure to protect our intellectual property; costs associated with governmental regulation; our ability to keep and retain key employees; our ability to sustain profitability; and the risks set forth under the “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 and other reports filed time to time with the Securities and Exchange Commission.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.  The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements. 

Non-GAAP Financial Measures

In addition to financial results reported in accordance with U.S. GAAP, PetIQ uses the following non-GAAP financial measures: Adjusted net income, Adjusted gross profit, Adjusted EBITDA, and Adjusted EBITDA Margin.

Adjusted net income consists of net income adjusted for tax expense, acquisition expenses, purchase accounting adjustments, integration costs and costs of discontinued clinics, new clinic launch expense, and stock based compensation expense.  Adjusted net Income is utilized by management: (i) to compare operations of the Company prior to our initial public offering and (ii) to evaluate the effectiveness of our business strategies. 

Adjusted gross profit consists of gross profit adjusted for purchase accounting adjustments, gross profit (loss) on veterinarian clinics and wellness centers that are not part of same store sales, and new clinic launch expense.  Adjusted gross profit is utilized by management to evaluate the effectiveness of our business strategies.

EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA plus adjustments for transactions that management does not believe are representative of our core ongoing business. Adjusted EBITDA margin is adjusted EBITDA stated as a percentage of net sales.  Adjusted EBITDA is utilized by management: (i) as a factor in evaluating management's performance when determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) allow for improved comparability over prior periods due to significant growth in the Company’s new wellness centers.  The Company presents EBITDA because it is a necessary component for computing adjusted EBITDA.

We believe that the use of adjusted net income, adjusted gross profit, adjusted EBITDA, and adjusted EBITDA margin provide additional tools for investors to use in evaluating ongoing operating results and trends. In addition, you should be aware when evaluating adjusted net income, adjusted gross profit, adjusted EBITDA and adjusted EBITDA margin, that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by these or other unusual or non-recurring items. Our computation of adjusted net income, adjusted gross profit, adjusted EBITDA and adjusted EBITDA margin may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate adjusted net income, adjusted gross profit, adjusted EBITDA and adjusted EBITDA margin in the same manner.  Our management does not, and you should not, consider adjusted net income, adjusted gross profit, adjusted EBITDA margin, or adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of adjusted net income, adjusted gross profit, adjusted EBITDA margin, and adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements.  See a reconciliation of Non-GAAP measures to the most comparable GAAP measure, in the financial tables that accompany this release.

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