PetIQ Inc (PETQ) 2017 Q4 法說會逐字稿

Greetings, and welcome to the PetIQ Fourth Quarter and Full Year 2017 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Katie Turner for opening remarks.

Thank you. Good afternoon, and welcome to PetIQ's Fourth Quarter and Full Year 2017 Earnings Conference Call and Webcast. On today's call are Cord Christensen, Chairman and Chief Executive Officer; and John Newland, Chief Financial Officer.

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

Finally, 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 press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

Management will also refer to net income and adjusted net income as well as EBITDA and adjusted EBITDA on today's call. For a calculation of these measures, please refer to the company's press release.

Now I'd like to turn the call over to Cord Christensen, Chairman and Chief Executive Officer.

Thank you, Katie. Good afternoon, everyone, and thanks for joining us today. I will provide a brief overview of our business highlights and recent performance. John Newland, our CFO, will then discuss our fourth quarter financial results in more detail and our outlook for 2018. I will follow-up to discuss our strategic growth initiatives and long-term view of our business. Finally, John and I will open the call to answer your questions.

At PetIQ, we remain committed to our mission to make pet lives better by educating pet parents on the importance of regular veterinarian care and veterinarian-recommended pet products. This mission continues to allow PetIQ to deliver significant results quarter-after-quarter and year-over-year.

We are very pleased with our finish to 2017. The strong execution of our strategic growth initiatives drove record annual net sales and profitability. For the year, net sales grew 33% to approximately $267 million. Our gross profit margin increased 290 basis points to 19.2% and adjusted EBITDA increased $11.7 million or 110% to $22.3 million compared to 2016.

2017 was a year of significant corporate milestones for PetIQ. In addition to our record financial results, we successfully completed our initial public offering and identified the highly complementary strategic acquisition of VIP Petcare, which we completed in January of 2018.

Our goal of increasing pet health and wellness by improving awareness, choice, accessibility and convenience of veterinarian-grade pet products and services increasingly resonates with new and existing customers.

In 2017, we generated strong growth across all sales channels and customers we serve. This includes mass, food and drug, club, pet specialty and e-commerce. For e-commerce, we had a much smaller contribution to total net sales, but a strong 300% plus growth rate. The evolution of e-commerce continues to be a compelling growth opportunity for us and we intend to be a trusted and valued partner to our customers that are pursuing a variety of go-to-market strategies to accommodate today's consumer shopping habits. Pet parents increasingly have greater opportunities to find their veterinarian-grade medications as well as their over-the-counter flea and tick preventatives wherever or whenever they want them. We believe our category leadership, broad product portfolio and compelling service offerings, value proposition and strong customer relationships will continue to fuel our future growth.

From our perspective, it is clear, the challenge for PetIQ is not where to find growth but the paths we will choose to pursue to achieve it. PetIQ is well positioned to take advantage of the macro trends that are happening in the pet industry, where there is rising pet ownership, pet humanization and increased aging of pets that all depend on better health care. The team at PetIQ has created a differentiated business model, solely focused on the importance of offering regular, convenient access and affordable choice for pet preventative and wellness veterinarian products and services, which provides us with numerous opportunities to drive growth and returns for our shareholders.

With that brief overview, I would like to turn the call over to John.

Thank you, Cord. I will now review our fourth quarter financial summary. Net sales increased 15.6% to $51.9 million for the fourth quarter of 2017, compared to $44.9 million for the same period in the prior year. This increase is significant when you consider the anniversary of our major expansion into Pet Specialty in the fourth quarter of 2016.

We continue to see significant growth as a result of the execution of our 4 growth initiatives, which were: grow consumer awareness of our products in the retail channel; deliver innovation in pet health at a great consumer value; expand strong partnerships with our leading retailers and pharmacies; and finally, increase the number of products with existing retailers.

Gross profit was $10.5 million or 20.3% as a percentage of net sales compared to $7.6 million or 17% as a percentage of net sales in the same period last year. The gross margin expansion of 330 basis points versus the prior year period was primarily due to the growth in net sales, which created improved economies of scale as well as continuous improvements we are realizing in the procurement and some new and refreshed products in some of our high-margin categories.

General and administrative expenses were $10.5 million compared to $7.5 million in the prior year period. This includes $2 million of expense related to our acquisition of VIP Petcare, which closed on January 17. Excluding these onetime expenses, adjusted G&A as a percentage of net sales decreased approximately 40 basis points for the fourth quarter of 2017 compared to 16.8% in the fourth quarter of 2016.

Adjusted net income increased by $3.8 million to $2.6 million for the fourth quarter of 2017, which compares to an adjusted net loss of $1 million in the prior year period.

Net loss was $3.4 million for the fourth quarter of 2017 compared to a net loss of $1.2 million for the prior year period.

Adjusted net income excludes onetime noncash expense of $3.4 million or $0.16 per diluted share associated with the revaluation of deferred tax assets as well as the provisional tax expense of $0.2 million associated with the deemed repatriation of foreign earnings, $2 million associated with the transaction costs associated with the company's acquisition of VIP Petcare, $0.2 million of stock-based compensation expense and public company costs of $0.4 million.

Adjusted EBITDA grew by 132% or $2 million to $3.6 million for the fourth quarter of 2017. From a margin perspective, adjusted EBITDA doubled year-over-year to a rate of 6.8% in the fourth quarter.

Turning now to the balance sheet. At the end of fourth quarter, the company had cash and cash equivalents of $37.9 million and an outstanding balance on our revolving credit facility of $15.3 million. The increase in cash versus the prior year period is primarily due to the receipt of $45.9 million in net proceeds associated with the company's IPO, which closed on July 26, 2017. The reduction of debt is due to cash generated by operations used to pay down debt offset by increases in working capital.

Before Cord wraps up with our prepared remarks, I'd like to shed some light on the new revenue recognition accounting standard that we will be adopting in the first quarter of 2018, offer some additional perspective on our corporate structure and influence of taxes, and then of course, share some thoughts on our 2018 outlook and plans for additional disclosures in the coming months.

In the first quarter of 2018, we will be adopting the new revenue recognition standard, ASC 606, using the modified retrospective adoption method. As a result, the cumulative effect of adopting this guidance will be an adjustment to accumulated deficit of approximately $0.3 million on January 1, 2018, which will have no effect on the 2017 results. Prior periods will not be restated. We expect the implementation of this standard to result in acceleration of certain trade programs, allowance accruals and other forms of variable consideration, thus reducing net sales in the first and second quarter of 2018, with a corresponding increase in third and fourth quarters relative to past practice.

Additionally, the company will classify certain costs associated with the display of product as cost of goods sold at the point in time transfer of control to the customer occurs. Previously, the customer had accounted for these costs as merchandising expenses in the period in which displays were utilized. To summarize, this will have a modest effect on our income statement. You'll see some shifting of dollars from G&A to cost of goods sold, which will translate to a slightly lower gross margin along with some subtle timing shifts when sales dollars are recognized.

Shifting to our corporate structure and some tax-related matters. The company utilized an Up-C organizational structure during its IPO, which created the dual-class share structure that we have today. This is comprised of the company's public Class A shareholders who hold stock in the publicly traded PETQ entity that in turn owns interest in the partnership in which our pre-IPO shareholders directly hold their interests along with their Class B shares of common stock. The Class B shareholders are treated as a noncontrolling interest for reporting purposes and receive an income allocation that they pay taxes on. What's unique in the way PetIQ structured its organization though is that the ownership group did not establish a tax receivable agreement or TRA. In practice, it's actually more common to include these TRAs among companies utilizing similar structures. By forgoing a TRA, the public company and thus, the Class A public shareholders receive the entire tax benefit associated with the deferred tax asset revaluation that the UP-C structure generated and will continue to generate as Class B shareholders convert to Class A shareholders. We think that this is an important value-added nuance to our public shareholders given the positive cash flow impact to the company.

The company was impacted by tax reform passed in 2017 as previously discussed. The company expects to shift to a cash taxpayer as earnings increase in 2018 and beyond and thus will benefit from the lower tax rate going forward.

As we look ahead, we expect to realize a new 25% statutory tax rate in 2018 and beyond, excluding the impact of the noncontrolling interests, which reflected the decrease in the statutory rates as a result of the recent tax legislation that was passed. The tax rate will not reflect cash savings generated by the UP-C structure and our lack of TRA. However, those savings are significant and will allow the company to put those cash dollars to use growing the business.

Now onto our 2018 outlook. PetIQ is reiterating its full year 2018 expectations that we originally shared in conjunction with the announcement of the VIP acquisition in early January. Specifically, we are forecasting full-year 2018 consolidated net sales in the range of $450 million to $500 million, which represents an increase of 69% to 87% year-over-year.

We are also forecasting 2018 adjusted EBITDA in the range of $40 million to $45 million, an increase of 79% to 102% year-over-year. The VIP acquisition will significantly diversify PetIQ's current net sales mix with the combined veterinarian products business representing approximately 75% of net sales and the services business representing approximately 25% of net sales based off of the aforementioned expected net sales forecast for 2018.

We also continue to expect incremental annual interest expense of $5.7 million associated with the financing of the transaction. Again, we expect to realize a 25% statutory tax rate, which reflects the decrease in the rates as a result of the recent tax legislation that was passed.

To assist with modeling the company's new subsidiary, PetIQ will be providing historical financial statements for the acquired VIP Petcare business as well as pro forma financials for the combined company. The preparation process is ongoing and we expect to have this work complete within the allotted 75-day window following the close of the transaction. Therefore, you can expect an additional filing the first week of April that contains this information. Please note, we also plan to host a conference call and webcast with details to follow in the next few weeks to review the information with everyone.

In conjunction with this work, we are evaluating our operating segments to align with our new more diversified business in an attempt to further improve transparency and help the investment community better understand and measure the drivers of each of the businesses. Given that transaction closed during the first quarter, we expect this to be part of our first quarter 10-Q filings and related earnings release. This concludes our financial overview.

I will now turn the call back to Cord for our closing remarks. Cord?

Thanks, John. As we kickoff 2018, we are undoubtedly a much larger and more diversified pet health and wellness company with the addition of VIP, and we look forward to demonstrating the strategic value of our recently combined veterinarian products and services platform.

As a quick reminder or for anyone new to PetIQ, VIP is a leading provider of veterinarian wellness and pet preventative services as well as a distributor of pet wellness products and medications. VIP provides a comprehensive suite of services at its community clinics and wellness centers that are managed through its 29 regional offices and hosted at local retailers across 31 states. Their services include a full suite of health and wellness services and products to include diagnostic tests, vaccinations, prescription medications, microchipping and wellness checks.

In 2017, VIP served approximately 1 million pets through its clinics. VIP's veterinarian services and products align with PetIQ's corporate strategy and mission to improve pet health by providing consumers convenient access and affordable choice to a broad portfolio of pet health and wellness solutions. We believe we have countless opportunities to leverage each other's relationships and we believe this will drive shareholder value over the long term.

Today, we are really excited to have the opportunity to also announce our first strategic step in the growth of our combined companies. We have signed definitive agreements with Walmart to open 20 veterinarian clinics. The first 2 locations will open next week with all 20 locations opening over the next 90 days. I'm incredibly proud of our team, who in a very short period of time, has been able to leverage our cross-functional capabilities and fuel the expansion of our first VetIQ pet care clinics.

As many of you know, Walmart has been a valued partner of PetIQ's over the last several years with our veterinarian-recommended pet products and they have consistently been supportive of innovative ways to help grow their pet health and wellness category offering. We believe this new and incremental veterinarian service partnership further strengthens our relationship.

In addition, we expect to open over 1,000 similar veterinarian service locations through 2023. We believe these incremental locations will help fuel total company net sales to over $1 billion with adjusted EBITDA margins in excess of 15% in the next 5 years. To accomplish this, we would need to expand our veterinarian clinics to less than 2% of our current retail partners' locations.

Today, PetIQ and VIP serve over 40 retail partners, representing more than 60,000 locations with almost no overlap, creating a significant opportunity for future growth nationally in both veterinarian products and services.

From an industry perspective, in 2017, Packaged Facts reported that pet owners spent $27 billion on veterinarian services and products and project spending to reach $34 billion by 2021. We continue to believe that there is a large underserved group of pet owners that aren't providing the care their pets need due to convenience, affordability and awareness. These pet owners are our retail partners' customers and we believe our model will help us provide the education, convenience and affordability to not only help lots of pets but fuel growth beyond what has been projected.

In summary, 2017 was a very good year for PetIQ. I'm incredibly proud of our dedicated team of PetIQ associates for their hard work and achievements throughout the year that enabled us to exceed our goals. We are pleased with our continued strong momentum and are incredibly excited about 2018 as well as the long-term opportunities for our business. We remain committed to executing against our growth strategies to generate value for pet parents and their pets, our retail partners, employees and shareholders. This concludes our prepared remarks.

John and I are now available to take your questions. Operator?

(Operator Instructions) Our first question comes from Brian Nagel of Oppenheimer.

My first question -- on the gross margin side, I guess this is looking at the business a little before the integration of VIP. On the gross margin side, you saw steady increases there in the [nice] -- in the fourth quarter. How should we think about the underlying drivers of that and the sustainability of that line going into '18 and beyond?

Brian, your connection is not real clear. I guess, I'll repeat back for you what I think you're asking and make sure I didn't miss anything in between. But you talked about our gross margin as a percentage and then the nice increases that we've seen in gross margin and pickup we've seen throughout last year and the reality of that continuing in the model going forward. Is that the right question?

Yes. That's it. Sorry about the connection. That's correct.

Look, we knew that we had significant momentum in that area through a lot of things we disclosed in our IPO. And we've seen those things benefit and we continue to dig in as the company matures and turns to have more mature staffing, to focus not just on getting the stuff out the door, but actually how we do it better. And as we continue to execute well as our synergies are out there in the market, our partners see that we're doing a great job, we've been able to have both mix and our supplier partners provide opportunities for us to enhance our margin profile as a company. We can't predict the future in that area completely, but we do feel like we've got a good solid base on what the model is and what's sustainable and feel strongly that we will continue to find opportunities to improve that and we look forward to talking with you guys in the next few weeks as we deliver these pro formas about the way margin overall as the company changes with the introduction of services. The service business is a significantly better margin profile than the product side of the business. And so we're anxious to walk through that with you guys soon. And I think your question and how you think about margin at PetIQ will be a little bit different as we start to get the unit economics of what we're doing there and how that applies and how we grow, now having this third leg of the stool in our business, which is that services leg that has to be factored into our overall mix. So no material change right now. Brian, it's going to be sustained and continue to improve. But we'll have a lot to talk about as we get these pro formas filed and have the rest of conversation.

Okay. Perfect. Then -- sorry for the connection here on my phone. One other question. As you talk about now as you work more and more towards the rollout, if you will, of VIP -- of the integration of VIP, can you talk about some of the synergies there? (inaudible) is the idea that you have a VIP center in the store, how that could actually help the sales of your core PetIQ products as well?

Okay. Again, I'm going to repeat the question, Brian, because we're getting not a great connection with you. But I think you talked about the synergies of the VIP relative to the rollout product, product mix, and just generally, how we look at the rollout and integration of the business. I think the VIP synergies couldn't be better demonstrated any better than what you've just seen us announce today. We have a really strategic platform and we said it before and we'll say it again, there wasn't 2 VIPs in the market to acquire. And the best thing we had is a very mature company that was hitting its stride, that had 29 regional offices, operating clinics and managing nice growth already across 31 states. And we, with not a lot of time, leveraged the best of PetIQ and VIP to come together and put together a plan that allowed us to be in a position to open up 20 locations in a relatively short period of time when you think of -- when we announced signing agreement, closing the agreement and now just next week, opening 2 more stores. And so we've got great synergies and just the productivity of the people and our ability and willingness and reach. And I think PetIQ was a great blessing to their business as well because we can take our great relationships and give them access to a new set of customers that could accelerate the business further. So that we're excited about. Obviously, secondly, there's lots of opportunities to look at how the synergies of us now having such a significant platform of veterinarians and that demand creation and how that demand creation strengthens our company's mode and our strategic value to really every participant in the value chain of providing health care for pets in the market, whether it's retailers that want to retain foot traffic and build foot traffic and increase sales to their customers by having a veterinarian recommendation and that prescription that's being written in those clinics. If it's the animal health partners that see that we have a path forward to increase the number of pets we're serving from 1 million pets to well over 6 million pets over the next 5 years, making us one of the largest clinic operators and treat -- and healthcare providers to pets in the country. Obviously, pet owners and giving them lots of locations to find affordable, convenient access to healthcare that they're either overpaying for or not providing and we're excited about that as well. Obviously, there's the obvious things of looking quickly at their product mix and our product mix and looking at how we help them and how they can help us. And we've already implemented a number of those initiatives in just the last 60 days as we start to work together. So we're pretty excited about it. Now the companies are very different and so we're not going to go in and screw up anything either. Because we can keep them doing what they've done well and just make it better by having provide them access to more help and more resources to grow faster. So we're -- we see the synergies as endless at this point. We're still figuring how much there is to monetize there.

Our next question comes from Bill Chappell of SunTrust Robinson Humphrey.

This is actually Stephanie on for Bill. I just wanted to dig in a bit further about the Walmart clinic expansion. Just trying to kind of figure out was this in the works when you announced the expansion and provided the guidance in early January? Just kind of meaning, does the guidance assume some revenue contribution from the stores or at the very least, the costs to build them out? And then kind of on that, to hit your 1,000 clinic target by 2023 that would mean you're opening 200 stores per year. Is this going to be a steady rollout from this point going forward or kind of how do we view that or an acceleration in the coming years?

Thank you for your question. We definitely had a view of the value of what services would be to our total retailer base, not just Walmart. And we had some high-level discussions about the potential of being able to do some of the things that we're talking about today in Walmart with various customers and the way they viewed the value of it. And ultimately, once we knew that we were going to get to a definitive agreement, we had more specific conversations with them that allowed us to accelerate going into a negotiation to move the project forward and was able to do that quickly. And there was a lot of simultaneous work going on at the same time as things were worked out during that time period. So I would say, we started early during due diligence, having some high-level conversations that got very focused once we knew we were going to come to an agreement. And then we got very serious around the middle of December and mid -- into early January to start accelerating our plans to make sure we could open up the clinics we just announced today. So it was something that was in the work but didn't have any definition to it until after the deal was already signed and we were getting much closer to where we are now. So that's kind of a timing discussion from a -- just rollout schedule. You have to appreciate that even getting 20 locations done in the period of time we did, we've leveraged 29 regional offices across 31 states. And those 31 states and those offices are where the majority of the population is in our country today. And when you really divide the numbers down into something that you could digest a little easier, you say, okay, if every single one of those offices were to open up 2 locations per quarter, we almost are at 200 locations just with that kind of a magnitude of, kind of, schedule. And we've looked at the schedule, we've looked at what the resources are and feel strongly that we can balance the right pace across all the regional offices to be in the position to open locations at the right pace. Now we have assumed in our modeling that it wouldn't be 20 becomes 200 immediately. We do believe 20 can become a significant number for next year. We'll talk more specifically about what those schedules are as we talk about our pro forma numbers when we share more information with you -- with all of you in the next few weeks. But we do think it will be a schedule that sounds something like 20 becomes 100 becomes 200 becomes 250 and continues to grow. The current numbers that are being discussed do include the top line revenue coming from the Walmart clinics. It does not assume any EBITDA contribution for this year. We've been very conservative on what those will do. We have a lot of historical data from VIP running other clinics. And we do know in the first 6 months there's a lot of investment that goes into that first 6 months. And in the second 12 months, you see significant contribution. And so we believe just due to traffic count and other things, we'll do better than what's been projected. But we do have the sales contemplated in the number and a conservative position on the EBITDA. John, relative to the capital investment?

Yes. I think the capital investments have been contemplated, whether it's actual expense or capital expenses as well in any of our forward-looking statements.

Our next question comes from Joe Altobello of Raymond James.

So first, I guess, since we're talking about Walmart, I'll start there. In terms of the expansion that you guys expect, what determines the rate of that expansion? Is it you guys or is it Walmart that would determine how quickly you can add those clinics?

Let's be clear, Joe. Our forward-looking statement around location expansion doesn't require to be at Walmart. We have 40 retail partners with 60,000 locations and we need less than 2% of those locations that makes sense. And we balance available locations across all banners and discussions that we're having we feel confident that those are available. Walmart is a great partner and we have nothing with them in place that says that they are going to guarantee us the next 1,000 locations. But they are very excited about things that generate top line revenue for them, things that are paying better returns on empty retail space in their stores and other people. There's a significant number of available real estate locations already. So we need to go in and operate 20 great clinics and prove that we'll be a great cotenant and partner in those locations and we believe the rest will take care of itself, but we are well on their plans in other locations. We have other clinics that will open this year with other retail banners that were already in place with VIP's partners and we know those are just as important if not more important with the standing relationships that are there. And the existing unit economics we already have in place and already through the full vetting process. So Walmart will be 20 locations. We have a strong belief on their contribution, but the expansion at Walmart is only one part of the total landscape we think we can expand the next 1,000 locations into.

Okay. That's helpful. And then maybe a question for John. How should we think about the impact from the new accounting standards in terms of the shift in revenue from the first half into the second half? And how much of, I guess, the SG&A costs move into cost of goods? Is it $5 million, $10 million? I'm just trying to put my arms around the type of numbers you're talking about?

Yes. It's hundreds of thousands to $1 million, Joe. I mean, it's nothing. Yes, it's nothing. When I use the term subtle, that's the reason that I chose that term in describing it, so. Yes. Not significant in nature.

Okay. And just one last one for you. If you could give us pro forma cash, debt and share count now that the VIP Petcare acquisition is closed?

Well, the share count's at 25.7 million and we will provide more information with our first quarter results on where we are from a cash and debt standpoint.

(Operator Instructions) Our next question comes from Kevin Grundy of Jefferies.

Cord, can you touch on what -- so the $1 billion looking out to 2023 in sales is impressive, particularly in this environment. I wouldn't ask you to revisit some of the assumptions or at least like the color around the build-out on the VIP side. But what is implied in that number with respect to the base business?

Well, I think, Kevin, the first thing is we've been messaging 15% to 20% growth rates on the business on a forward-looking basis. The base is now $450 million to $500 million as it is. And the reality of it is, if you run your compounded growth rate out on those numbers, we get really close to $1 billion just through what we've been performing. And this last year, we obviously were greater than those growth rates. And obviously, with what we've put together for next year, we're again going to be greater than those type of growth rates. So the $1 billion is a number to put a stake in the ground that we put out there that is driven off of a number of assumptions. Some of those assumptions will become a lot more clear when we put out the information with the pro formas. But the unit economics of our clinic growth is going to be a key driver, Kevin. I think all we've really said to everyone is with the acquisition of VIP, the base product business is going to grow. But we're going to have the opportunity to influence and be a lot more control of drivers that will guarantee the growth rate and guarantee the top line. The real exciting thing is when we take that historical information, we look at those unit economics and take what we know how to do here and apply that to the business. We think we've got an opportunity to have a significant expansion in our adjusted EBITDA margins and a significant amount of control over how we can control the outcome on getting those numbers to be realized. So I think we've really done and we said at the start of this is we've added a third leg of the stool. It gives us a significant opportunity to influence product sales, influence service sales and influence a significantly higher-margin business for the company going forward. And so we really put the $1 billion mark out to say that's the math and what we've been saying all along. And this just gives you a much greater sense of security that we have a path forward that we're going to get there and we're going to get there in a more profitable way.

Okay. I guess we can wait to get more specifics between -- by segment. And then the guidance, Cord, for the year is still pretty wide on the top line. What gets you to the low-end when gets you to the high-end? What are the key variables as you see it today?

Well, I've never communicated high-end if I didn't think I could get there, Kevin. I think you know me by now that we don't put those ranges and just think we're going to hit the target in the middle. So we're laser-focused on hitting the high-end relative to our sales. And the range, I think, that we've put out there from an earnings perspective is really about us saying that we need to have an opportunity to provide you with our pro forma information, show you the foundation we've put onto the business to have the real plans in place to have accelerated growth to deliver against our clinic plans. And I think everyone will agree that we have a shot to have a really solid great year in the range, but have the right investments that we're making to be ready for what we can deliver in '19 and beyond. And so it's a wide range, but I think with the amount of transformation the business is going through, until we file the pro formas and have that next conversation, I think it's a responsible way to do it. But we're very confident that everyone's going to be excited about the plans and the plans forward and what that means as we are able to give more granularity when we file the pro formas and have the conversations.

Okay. A couple more for me. Can you talk about the current retail environment? There's tremendous amount of discussion broadly in staples right now, and how difficult it is and a number of companies have had issues. With inventory destocking, it's difficult to take pricing, et cetera, et cetera, all things that I'm sure you're aware of. Can you touch on that specifically? I understand there's a lot of exciting things going on in the VIP side of the business, but maybe talk about the base business, where you actually have seen some slowing in the Nielsen data, so you guys are growing really well and now it's down to about -- or you're up about 5% in the latest 4 weeks, which is slowing down from mid-teens kind of growth. So I guess a couple of questions sort of layered in there, what's driving the slowdown? And understanding that Nielsen doesn't capture everything, but it does capture Walmart. So the slowing there is noteworthy, maybe you can touch on that. And then broader sort of comments, Cord, on the retail environment, setting aside, I guess, sort of the VIP expansion plans?

Yes. Okay, Kevin. I'll try and get all 6 questions, again, in one go. I think in general, the broader retail environment, there's so much out there to be read around who people believe are winning and losing and it wouldn't be in our best interest to really comment on those. I think that information is available. We have 40 meaningful customers. Our business is up year-over-year from '16 to '17 and will be up significantly from '17 to '18 across every segment, Kevin. So we're -- we will be up in every segment. We've always talked about the growth drivers of our business and some of it is growing the year-over-year based on consumer awareness and transferring traffic. Some of it is our model becoming stronger and having a deeper mode than our ability to replace competition that had previously not organized themselves to be as strategic about the business as us. Some of it's new item introduction, which at times we cannibalize our own business. When you put items out there that are of a better value and you move units into lower dollar sales, it's going to affect some of that data. So Nielsen's a great indicator on winners and losers, but there's a lot more layers to it when you measure PetIQ and what we're doing because the way our business model works. And you said it best, when certain channels that don't report are up significantly more than other channels that do report, the data becomes a little bit skewed. This year, in particular, the last 4 weeks, we have not seen the usual tick up in the flea and tick season as we've seen in past years, it's been a little bit slower than normal. We've also done a pretty major revamp with a couple of our retail partner -- or animal supply partners and retail partners to better support a long-term, healthier channel strategy for their products, which required us to revamp the inventory that was in the stores, which means they went to 0 inventory for a time period while we put that new product in. We're back in fully and stocked with that item and we think it'll drive increases and extend the longevity of programs that due to the channel strategy and being out of balance with some of the online retailers could have caused more dramatic impact in the future. So we did some things right for the business. So right now, no one's concerned because we're seeing the data and we've been having record weeks and on track for record months. Again, 2 months in a row. So the business is doing well right now and we're seeing some of the best days we have seen in a long time. So I don't -- probably, missed 3 questions, Kevin. So ask again, if I missed something?

No. That was good, Cord. Just one last one, if I can. It will be for John, I guess. Year-over-year increase in inventory looked a bit high relative to the increase in sales. Anything noteworthy there, John, in the quarter with respect to timing and shipments or change in terms with retailers?

No. No really change in terms at all. It was just gearing up for all the crazy activity that we have going on today, Kevin. We have serious volume going out the door on a daily basis. And at the end of the year, there's natural build that had to occur in order to be able to meet the demands of our customers, which I'm happy to say we're still at the highest levels of meeting our customers' needs. And so no, it was just to meet the demand for the upcoming season that we're in the throes of right now. And we couldn't be happier with how that positioned us for this time frame.

Kevin, my only -- to add to John's comment is, we've maintained our same 8 weeks of supply position through this entire quarter and into December of last year. A big part of it was, we took under a significant process of again aligning some of the channels and brick-and-mortar to better support what we believe the long-term strategies to be, to be true to the channel strategy conversation we're constantly communicating to the market, which caused us to take a big, big significant position to get that work done. So we're completely relaxed as it relates to inventory levels. Because like I said, it's going out the door as fast as it's coming in the door at this point.

Okay. One last one. Any update, Cord, on the Fairness to Pet Owners Act?

Yes. We've been back in D.C. over the last few weeks to just -- we're having some meetings to understand what's going on. We obviously continue to be hopeful on the progress of it because we think it's the right thing for pet owners to have the choice. Our indications from D.C. is that we believe it will be reintroduced in both the House and the Senate from a bill perspective in the next 60 days and likely in the next 30 days. But again, that's an upside to drive further acceleration. And obviously, us taking a lot of the demand creation to our own hands with our own clinics and our own veterinarians less of a factor to drive explosive growth in the prescription category, but definitely something we would welcome.

(Operator Instructions) Our next question comes from Luke Christianson of William Blair.

So first on the base business, it's kind of -- wanted to hear an update on whitespace opportunities. I think previously in the base your biggest whitespace is -- our understanding was in the drug and grocery channels. Is that -- have you succeeded in winning any opportunities there? Are those still whitespace going forward? Any color around that would be great.

Yes. We actually finished the year strong with being able to put some things together and start doing business with one of the 2 largest drug chains in the country and are very excited about that expansion and having that relationship started. As everyone knows, they've watched us. Once we get our toe in and we start to execute and show the value we create for the consumer and the pet owners and ultimately, just execute. We've always been able to spread out and grow. And so adding access to a significant number of doors through that expansion I think is significant. We've also seen great movement in moving into whitespace inside of existing customers by expanding pretty significantly for this year. And so the base product business, we've messaged that the range is $450 million to $500 million. And if you read the fine print, we also message that the service part of our business will roughly be 25%. And so we really thought the product business going into this year would be closer to $300 million. And you do that math and work backwards. We're giving you a range of 75% of $350 million to $400 million, which says we're on track to be better than what we expected.

That's great. And then in terms of mix, is there any change to -- in the retail product business between distributed versus owned brands. I know you guys had previously messaged that they stay generally constant percentages, but I wanted to get any updated thoughts on that.

Yes. I think we've always said that we'd obviously love to sell more of the stuff we make money doing, which is obviously the stuff we manufacture. But in a world where our prior market size we were serving was -- participating in an $8 billion animal health products business, now with the addition of our services business we get to address the entire $27 billion of products and services both. With that kind of size and being a $450 million to $500 million revenue business, we can't always control what the mix is going to be. And so what we make sure is that whatever the mix is and whatever we're doing business in, we're able to generate a fair return for our company and for our shareholders. And I think that stands true. We still continue to be committed to growing the business in the way that the market needs us to grow it. Innovation comes from a lot of places. At times we're bringing in things that we make more margin in, sometimes innovation comes from the animal health companies and is driven off of veterinarian recommendation. And so we've had a very strong showing for many years about our ability to continue to be in front of that trend. And still feel like we're committed to the right path forward. And ultimately, the mix that we'll see will be driven off of a lot of those factors. And this next year, we're still excited about what that mix is going to look like.

Got it. And then switching to VIP, I'm assuming -- so the new Walmart locations you announced today, I'm assuming those are permanent as opposed to the temporary clinics that VIP operates. Is that correct?

Yes. So when we talk about community clinics, that would be a temporary mobile clinic that would be more of a pop-up store, a day at a time type of an operation. When we reference a health and wellness clinic that would be a fixed-base clinic. And VIP operates both types and has a very nice history in both types of clinics. The 1,000 locations we're talking about is the health and wellness clinics that would be the fixed-base type clinics. And Walmart would be in that health and wellness fixed-base clinic.

And then how many of those health and wellness clinics do you have now or does VIP have?

We're in the teens right now -- mid-teens, with the plans right now to be able to open up another roughly similar number during the 2018 year.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to management for closing remarks.

We thank everyone for joining today. Obviously, we've shared a lot of information and a lot of information for everyone to digest. We're, again, couldn't be more proud of our associates, our partners and all of our great pet parents out there that continue to reward PetIQ as we execute our plans to help pets have better health care and access it through convenient, affordable locations across the United States. We appreciate your support and we look forward to continuing to have a very successful 2018 as we continue to implement our plans. We very much look forward to providing more information in the coming weeks with us planning to have information available the first part of April. And then obviously, another time to communicate when we release first quarter earnings. So I'm sure we'll be having lots of conversations with many of you and we look forward and welcome those conversations. We appreciate everybody and look forward to a very successful and fruitful 2018. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.