PetIQ Inc (PETQ) 2018 Q1 法說會逐字稿

Greetings, and welcome to the PetIQ First Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Katie Turner of ICR. Please proceed.

Thank you. Good afternoon, and thank you for joining us on PetIQ's First Quarter 2018 Earnings Conference Call. 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 belief and involve risk and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K for the year ended December 31, 2017, 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.

Finally, please note on today's call, management will refer to certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA. 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.

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

Thank you, Katie. And good afternoon, everyone. Today I'll provide an overview of our strong start to 2018 and discuss the progress we have made on our Follow the Pets long-term growth plan. John will then review our first quarter financial results in more detail and reiterate our annual guidance. Finally, John and I will be available to answer your questions.

Our team executed at an incredibly high level during the first quarter. We generated record quarterly net sales of $115.1 million, a 71.7% increase over Q1 of 2017 and adjusted EBITDA of $5.4 million. Both net sales and adjusted EBITDA were above the high end of the first quarter outlook we provided in April. We are very pleased with our business momentum. Our business is well on track to have a record year.

The first quarter financial results reflect the strength of our diversified business model across products, services and sales channels. This past quarter, there has been a lot of discussion about the slow start to the flea and tick season. All of it is warranted based on the extremely cold spring we have had across the company, and Nielsen data in measured accounts reporting that flea and tick category was down 18% compared to last year. PetIQ, despite this slow start to the season, did extremely well.

The first thing I want everyone to understand about our company is only 36% of our sales in Q1 were in Nielsen-measured sales channels. The 64% of our sales that was in unmeasured sales channels dramatically outpaced the measured flea and tick customers. PetIQ has an extremely diversified business across over 700-plus items, 7 different categories and one of the most diversified customer bases in the country.

For example, our e-commerce sales channel had the highest growth rate for the fifth quarter in a row and much higher than the total company 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.

Our prescription drug program had the highest product category growth rate of all our product categories. This is driven by more consumers using our pharmacies to fill their scripts and a significant number of pet parents using chewable prescription flea and tick products instead of OTC options.

In addition, during the first quarter, we gained over 2,100 new points of distribution in brick-and-mortar across food, drug and mass, farm and feed and independent pet sales channels. Pet parents increasingly have greater opportunities to find veterinarian-grade medications as well as their over-the-counter flea and tick preventatives wherever or whenever they want them. Our mission to make pets' lives better with more affordable and accessible veterinarian services and products has never been stronger. The mission continues to allow PetIQ to deliver significant and consistent results quarter-after-quarter and year-over-year. We believe our category leadership, broad product portfolio, compelling service offerings, value proposition and strong customer relationships will continue to fuel our future growth.

The first quarter also represented a significant corporate milestone for us with our previously announced strategic entrance into the large and rapidly growing veterinarian service industry through our acquisition of VIP Petcare. Bringing these 2 companies together, we believe, sends a very clear message that we can bring value to everyone, healthier pets, saving pet owners time and money, adding value to retailers through new sales and adding an incremental traffic driver, helping the animal health industry grow faster by accessing the highest concentration of pets that never go to the veterinarian and ultimately, all this adds up to us increasing shareholder value.

We are quickly leveraging best practices across our organization and opened 2 VetIQ wellness clinics on time and under budget during the quarter. Nine additional clinics so far in the second quarter and remain on track to have all 20 open by the end of the quarter. We also opened 1 VIP wellness center in the quarter. In total, we ended the first quarter with 2 VetIQ and 10 VIP wellness centers. This is just the beginning of our execution on our Follow the Pets long-term strategic growth initiative. Today, approximately 86% of pet owners purchase their pets food at our retail partners. As we announced earlier this year, we plan to open at least 1,000 veterinarian health and wellness centers by the end of 2023 with our retail partners, which we will fund through the strength of our balance sheet and cash flow and will require no outside capital sources. We will follow these pets and pet owners by bringing veterinarian services and products to where they are already shopping for their pets' needs. We believe we are well positioned to drive incremental growth and value for everyone with this program.

We continue to share best practices across our organization through our ongoing integration of VIP. During the first quarter, we completed our review of the mobile clinic business and have implemented changes in the second quarter that have already increased profitability of this service segment. Due to discontinuation of approximately 370 host mobile clinic locations, we have seen immediate benefits to our average pets per clinic, dollars per pet, while eliminating operating costs. We expect that additional performance improvements will be realized as we optimize frequency, location and clinic hours. The unit economics of our VetIQ and VIP wellness centers are very attractive.

On our call in April, we referenced a survey done with the American Animal Hospital Association that said the average services revenue of a veterinarian clinic is over $700,000 per year. Based on our historical numbers from our current operations of VIP and studies we've done in a number of different areas in the market, we continue to believe our conservative first year projection for a new clinic will be approximately $375,000 in sales, with a net contribution margin of negative $25,000. This ties to the fact that the day we open, there's no business or awareness and it builds a little bit each month, with estimated maturity sometime between month 13 and month 18, getting us to a mature level of at least $640,000 of revenue, with the net contribution of $190,000, while roughly a 30% contribution margin. The payback for all the investment that will be made between capital expenditures and preopening expenses will run roughly between 24 and 36 months. PetIQ is well positioned to take advantage of the macro trends that are happening in the pet industry, where there's rising pet ownership, pet humanization and increased aging of pets, it all depends on better health care. We believe PetIQ has created a differentiated business model, focused on providing convenient access and affordable choice for pet preventative and wellness products and veterinarian services. This provides us with numerous opportunities to drive growth and returns for our shareholders. We look forward to another exceptional year of execution and strong financial results.

With that overview, I will now turn the call over to John.

Thank you, Cord. I would like to reiterate how excited we are about our first quarter results, and our team's ability to deliver on the financial targets we provided on our business call in early April. Net sales and adjusted EBITDA were above the high end of our guidance. During the quarter, our team did a great job of managing all the controllable aspects of our business. As we move forward, we continue to believe we are well positioned to achieve our growth objective. This is an exciting time for us at PetIQ.

With that, let's review our first quarter financial summary in more detail. With the acquisition of VIP, we now have 2 reportable segments, products and services. The first quarter 2018 consolidated net sales were $115.1 million, an increase of $48.1 million or 71.7% over the first quarter of 2017. Organic growth was primarily driven by further penetration of existing accounts with distributed products across different channels and new customer wins. This was partially offset by the impact of adopting ASC 606, which creates some subtle timing shifts as to when sales dollars are recognized. VIP sales contribution for the quarter-to-date period since closing the transaction on January 17, 2018, makes up the balance of the reported year-over-year growth in the first quarter.

Product segment net sales for the first quarter were $97.9 million, an increase of 46% year-over-year. Product segment operating income was $8.9 million, an increase of about 6.5% compared to Q1 last year, after adjustments for the impact of ASC 606. As Cord mentioned, we are very excited that we realized significant gains in new points of distribution for our manufactured product. We continue to have excellent traction within our distributed business and are focusing our efforts on establishing new customer relationships. It should be noted that this mix shift for 2018 toward distributed product is consistent with communications we provided during the April business update.

Service segment net sales on a reported basis since January 17, 2018, the date we acquired VIP, were $17.2 million and an operating loss was $400,000. The prior year period, the first quarter of 2017, predates our acquisition of VIP and as a result, no financial contribution was recorded. As Cord mentioned, we are excited about the quality of the base services business following the right -- some rightsizing of the network, and we remain confident about building the business from here as well as expanding our retail presence with the new wellness centers.

First quarter 2018 adjusted EBITDA of $5.4 million and adjusted EBITDA margin of 4.7% were above our guidance. I'd reiterate how the cadence of earnings has changed with the addition of the services business to our consolidated financials. We anticipate that EBITDA as a percentage of net sales will be seasonally lower in the first and fourth quarters and higher in the second and third quarters. First quarter 2018 gross profit was $15.9 million or 13.8% as a percentage of net sales compared to $12.2 million or 18.2% as a percentage of net sales in the same period last year.

You should note that there was a noncash purchase accounting inventory adjustment associated with the VIP acquisition that was recognized in the first quarter of 2018's cost of goods sold in the amount of $1.5 million. This had a 130 basis point impact on gross profit margin. Adjusting for this onetime inventory change, adjusted gross margin was 15.1% for the quarter, which we will use as a basis for the bridge. To provide better color, we need to compare the prior year 18.2% margin to the current year adjusted 15.1% margin. To explain the 310 basis point difference, I will need to cover 3 specific areas: first, the adoption of the revenue recognition standard ASC 606 in the first quarter had a cumulative effect of reducing net sales and gross profit in the first quarter, with an offsetting increase in net sales and gross profit in the remainder of the year. This also has the effect of reclassifying cost that were previously accounted for within G&A and moved these to cost of goods sold. This impacted gross profit margin by 70 basis points and will have a corresponding 70 basis point pickup to our gross profit margin going forward.

Second, there was a 140 basis point impact related to the anniversary of the launch of our Advecta 3 and PetLock Max product in the first quarter of 2017. This does not affect the margin for the rest of the year, as the comparison will be against replenishment of product as opposed to the initial fill orders at the launch in the first quarter of 2017. To summarize the 2 points, we expect to have an increase in our gross profit margin of approximately 210 basis points for the remainder of the year.

Third, there was a 100 basis point impact associated with the mix shift towards distributed items.

General and administrative expenses were $19 million or 16.5% as a percentage of net sales, which was better than the guidance we provided in early April. G&A includes $3.2 million of expenses related to our acquisition of VIP, which closed during the quarter. Excluding these onetime expenses, adjusted G&A as a percentage of net sales was 13.7%. Overall, we are really happy with our expense rate as they came in better than planned for both the product and services segment. The drivers of the lower expense run rates reflect the adoption of ASC 606, which shifted $656,000 from G&A to cost of goods sold in the product segment and lower-than-anticipated amortization as a result of updated purchase accounting for our acquisition of VIP. Going forward, this will translate to approximately $700,000 of savings on a quarterly basis through the balance of 2018.

Net loss was $4 million for the first quarter of 2018 compared to a net income of $4.3 million for the prior year period. First quarter net loss includes $3.2 million in onetime transaction cost associated with the acquisition of VIP. $1.5 million of purchase accounting inventory adjustment. An additional $500,000 of expenses including stock-based comp, a fair value adjustment of a contingent note, clinic opening cost and integration cost, partially offset by a tax benefit. Excluding these items, adjusted net income was $1.3 million in the first quarter of 2018 compared to an adjusted net income of $4.3 million in the prior year period.

Turning now to our balance sheet. At the end of first quarter, the company had cash and cash equivalent of $4.7 million compared to $37.9 million at December 31, 2017. The company's long-term debt balance, which is largely comprised of its revolving credit facility and term loan, was $126.9 million as of March 31, 2018, compared to $17.2 million at December 31, 2017. The decrease in cash versus the prior year period is primarily due to the acquisition of VIP, which closed on January 17, 2018.

Now onto our 2018 outlook. We are reiterating our full year 2018 expectations that we originally shared in conjunction with the announcement of the VIP acquisition in early January. Specifically, we are expecting full year 2018 consolidated net sales of $450 million to $500 million, an increase of 69% to 87% year-over-year. And 2018 adjusted EBITDA of $40 million to $45 million, an increase of 79% to 102% year-over-year. With respect to our 2 segments, product and services, we're also reiterating our net sales guidance for each that we provided on April 2. We also continue to expect incremental annual interest expense of $5.7 million associated with the financing of the transaction for a total 2018 interest expense of approximately $7.4 million. Again, we expect to realize a 25% statutory tax rate, which reflects the decrease in the statutory rate as a result of the recent tax legislation that was passed.

In closing, our entire PetIQ team worked hard to deliver these results, and we are very pleased with our 71.7% revenue growth, with earnings over the high end of our guidance.

This concludes our financial overview. Cord and I are now available to take your questions. Operator?

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

I've got maybe a few questions here, I'll try to wrap them quickly. First off, Cord, you started talking about -- there were comments on the flea and tick business. So my question there is, as the weather has, I guess, normalized, have you seen an improvement in that business? And I guess, subsequent to the end of the quarter. And then also if you could quantify maybe a little better what impact weaker flea and tick sales did actually have on sales in the quarter?

Yes. Well, I think, Brian, I think taking your question a little bit in backwards order. I mean, number one, you see that our sales were extremely strong for the quarter. And I think we've let all of you know that we've got an extremely diversified business that has significant customer diversification between measured and unmeasured accounts. This is the first time I've ever communicated that our measured accounts that report to Nielsen in Q1 was 36% of our business, which means unmeasured accounts were 64%. Unmeasured accounts are doing extremely well and made up for any disappointment we would've had in the measured accounts. Nielsen data had flea and tick category in total negative 18% through the end of Q1 and had it negative 21% through April 21, which was the last data pull that we have seen. Scanned data through the register across all accounts, both measured and unmeasured, and the significant replenishment orders, as we've seen, the 1st of May kick-in leaves us to feel very comfortable that not only did the trend we saw in Q1 that allowed us to have such an incredibly strong sales quarter, we're seeing some of the best days we've seen in the history of the company, with last Friday being the most significant number of flea and tick orders we've received in the history of the company in a single day. So the season's definitely starting to warm up significantly with suns out, we're seeing absorption rates, significant rates, and I'm confident you'll see the measured accounts data start to be significantly better when the May data polls. And we're definitely with, not only this, the overall diversification across prescription drug and health and wellness items and services and everything else, that the tough start to the measured accounts in the Nielsen side had no impact. Just the opposite, we've been able to have enough diversification that you've seen the company go out the top end of the range that we were expecting for Q1.

Got it. Helpful. And then the next question I have is probably one for John. With regard to the gross margin commentary you outlined, just wanted to make sure I heard this correctly. So if you were -- as you previously discussed, there were a number of kind of onetime-ish factors impacting the gross margin we saw down year-on-year. So if we -- as we go through over the -- I just want to make sure I heard correctly, so if the balance of the year, so next 3 quarters in aggregate, you should expect gross margins to be up 210 basis points. So is that correct? And correct me if I'm wrong.

That's 210 basis points over the base run rate for Q1, Brian. They'll actually be higher in general. And I'd like to take you through a bridge, if I could, on gross margin in general, because we did anticipate there'd be some questions here. I think I'd like to remind everyone that when we provided the pro forma numbers and -- about a month ago, it was based off at $393 million combined pro forma sales. That carried a 22.3 historical margin percentage. So that's -- for your models or how you look at it, I mean, I would assume that's your basis on how you look at the business going forward. But remember at that time, we also communicated that there was going to be a 150 basis point mix shift associated with the change in mix of product that was being sold. And then from there, we also have a move of 1.9% between G&A and margin. And that's just a result of finalizing our accounting policies for the new combined company as agreed to with our audit partners, KPMG. So there was a corresponding decrease to what you would expect from G&A of 1.9%, the percent of sales going forward as well as a decrease in margin percentage as well. I think that if you take all of that in consideration, it gives you a pretty good understanding of what we should expect from a margin percent for the rest of the year.

Got it. And then my third (inaudible).

Our next question comes from Bill Chappell with SunTrust. Bill, your line is live.

Can you hear me now?

We've got you, Bill.

I'm learning this phone thing. Cord, just to kind of clear up a couple of things. Can you let us know, for the quarter, what percentage of your sales or product came from the gray market? And kind of related, how your relationships have changed for better, for worse, over the past 2 months with the animal health companies, in terms of, now that you own VIP? And is there any way to qualify that?

Yes. And we've tried to answer this question numerous times over the last few months, and I'll try and put it to bed once and for all. If you think about our business, obviously, the products we manufacture come through our factories, we're the manufacturer, those wouldn't be considered in this question. But if you take the isolated items that we distribute, where we're supporting animal health manufacturers, 2% -- less than 2% of our current products that we distribute would be considered secondary sourced or gray market as you referenced it. We would have a little bit less than 8% today, based on our Q1 results, that would be done through what we're calling an authorized distributor or a designated distributor or an animal health manufacturer that asked us to purchase through a specific distributor partner as their authorized distributor. The balance of the product that we distribute, we have direct relationships with the manufacturers that we are in multiyear contracts and those terms are significantly better than what they've been historically with the companies and has put us in a place where we've never had stronger relationships with the companies. So roughly 90% of our distribution business is through a direct relationship with the animal health manufacturers. Very different than the rumors or things that have been implied out in the marketplace about how the company is currently being supported. And I think you see it, in the fact that we're achieving a 71.7% increase in sales and going through the top end of the range and are expressing such confidence in our ability to easily be inside of the range and to the top end of the range that we've communicated from a sales perspective, Bill. So hopefully, that dispels this once and for all, and we can focus on the results that we're delivering to the company and how positively the businesses operated in helping people find great veterinarian products and services through where they want to shop and when they want to shop.

No, I appreciate the color -- clarification. On the VIP business or on the wellness center business, can you maybe give us some color, have you heard from other retailers since this has been announced? Is -- and also is there a chance that the number can go meaningfully higher this year? Or is it really more of a focus on next year?

Yes. So I think, this year, we've given a range of 20 to 30 units. It's unlikely that we will surpass that 20 to 30 units when you think of lead times on reviewing sites, leases and all the stuff that needs to happen. And the other part is us being responsible and allowing ourselves to gauge the success of the clinics and how they're performing, make sure we're seeing the right activity and the replication that we've seen in past models. And so we feel like we have a responsible level that we've communicated and are now watching those results to see if we want to accelerate what takes place in future years. Right now, what we judge success by today is, we opened up -- in first quarter, we opened up 3 wellness centers, 2 VetIQ wellness centers and 1 VIP wellness center. So we did have 2 different retail banners that we opened up wellness centers in Q1 of this year. So far, in Q2, we've opened up another 9 wellness centers, and we're on track to have all 20 locations open by the end of the quarter. So from an execution of the timing of the program, how positively our team is able to deal with recruiting, hiring, training, getting great looking facilities with great services ready to be deployed out of the market, we're -- we feel very good about the results. We're also excited because we assume that these first locations would be the most expensive locations that we would deploy because of the speed that we were trying to deploy them. And even with that speed issue being hit and us delivering on schedule, we're already seeing that the capital budget that we've anticipated are high and conservative, and we've been able to do better than what our initial projections are. So we're feeling really good about the ability to get locations out there. And considering the 13- to 18-month mature schedule, we're right where we think we should be relative to opening and initial customer response. And so it's early in the innings, but the things that you can measure, we definitely feel like we have the right batting average, and we're going into the right innings with the right tools.

Our next question comes from Kevin Grundy with Jefferies.

John, a question, if you wanted to come back to the gross margin. So 2 questions, really. What's the right gross margin for this business longer term? And what have you embedded in your long-term guidance? Just trying to parse out here how much of this is structural. And it seems like the mix shift going towards distributed products on the legacy business, seems like that will likely be something you'll have to continue to contend with. And I'm just still trying to get there, I guess, relative to the pro forma number, which was 22.3% in fiscal '17. So sorry to harp on this but I just wanted to make sure I'm clear.

Yes. So in early April, Kevin, we talked about the fact that there was going to be a compression of a 150 basis points off of that 22.3%. So -- and that just dealt with the fact that we had a higher concentration on our distributed items, the all new customer wins associated with that, that we're very excited about. And then additionally, we did have some geographic changes between G&A to margin from an expense standpoint that was just as a result of the finalization of our accounting policy, which basically takes us where you would expect a run rate for the remainder of this year. As you look forward, the better question is how do we expect that to pan out as we go forward. And with the growth of these wellness centers, it's obviously a higher margin -- the service model is a higher margin model. So we do expect margins to raise in 2019 and beyond as we continue to build out the service center model.

But on the base business, John, is it fair to say that, that drag will be likely there. I think, if you go back at some point in time, the hope was maybe to push some of the branded products. But I think the way -- and the growth has been fantastic, but where it's been coming from -- this is on the legacy business and not on the VIP business, has really been coming from distributed products. So is it your expectation that will continue to be the case? And if so, understanding the mix shift on the retail side, but on the legacy side that will likely continue to be a drag. Is that fair?

It is. That 150 basis points that we've talked about was for the year, right?

I think -- Kevin, this is Cord. But I think we have to appreciate that the growth rate we've seen this year is significantly higher than what we would expect to. And if we were trying to project the rate at which you're going to see a shift from the vet channel over or that we're going to disproportionately win control over being the preferred choice to support the animal health products in retail, we may see some extreme growth in the distributed items in those events that take place. And we -- good news is, is we don't see G&A expanding much from here. It's very little expansion to support significant growth in these categories. And so although it can be that, if we're growing at a more realistic growth rate, you won't see the normal drag. And if we're growing at an extreme growth rate, the dollar contributions will be significant. And as John said, when you look at the services business and what that mix is and what it starts to drive, you should start seeing significant margin accretion due to the service margins. And ultimately, the demand creation we create in the prescription business and the margins associated with that are some of our better margins from a distribution model standpoint. So I think the model's very healthy going forward. And it's -- what's so hard is when you're making a market for the first time and you're significantly impacting such a change in growth in a market, we try and do our best to project what's the right growth rate across everything. And then you'll have years like this, where we have such significant increases, and it's driven off of expanded technologies and prescription, with 2 new significant entrances in chewable flea and tick this year that we're seeing benefit from, huge gains in distribution on distributed flea and tick as our model starts to be significantly stronger and the preferred choice versus alternatives. But we're very confident in the trajectory and the total and the balance we're going to see in the future and couldn't be more excited about sales and profit dollars that we're generating and where that leads in the future. As you blend all 3 contributing factors, our manufactured product, our distributed product and our services business.

One more follow-up, just on the flea and tick commentary, because the Nielsen data that we have, Cord, this is true even through like early May. So for your own brands, it was still down mid-teens and that builds on sort of mid-teens declines that we saw in the month of April. So I guess, can you just reconcile that? I mean, you talked about better growth in non-tracked channels, you talked about better growth in Rx and online. And then all the commentary also suggests you're getting much better growth in the distributed products versus owned brands. Is it a combination of all of that? Because, I guess, the Nielsen data that we look at suggests that some of the -- and granted you're going up against some difficult year-over-year comps in Nielsen channels on your owned brands. But is that sort of -- are those the factors? If you could just sort of reconcile what I'm looking at and Nielsen data versus the strong trends you referred to?

Kevin, I don't have your specific reports, so when we have our own call, maybe it would be good for you to share exactly what you're looking at so I'm not trying to take my report and think it's the same as your report. I have all flea and tick, not just my brand, sitting in front of me right now, through the end of Q1 and through the 21st of April. 18% down through Q1 and 21% down through the 21st of April. We've seen a significant change in that. We do have some specific anomalies where we've had a specific customer that was a serious contributor, pull back significantly on their inventory levels and pull back significantly on their displays. But that 1 account can affect the numbers. But again, not knowing exactly what you're looking at, I can't comment specifically the differences in what you're looking at. What we have seen is what the level of orders are coming from our most important tracked accounts and what the orders coming in and what the sell-through is from our unmeasured accounts. And our flea and tick number is extremely healthy, which is contributing to our success. But then you take our services business, you take our prescription drug business that I've told you, from a category standpoint, has our highest growth rate. And then e-commerce, which we've had significant increases year-over-year and have a very good contribution across all aspects of our business, flea and tick and other aspects. So the business is performing extremely well, the season has definitely turned at this point. And we see us making up any losses we had in that specific measured account segment, which is 36% of our sales in that small category. But we're well on track and feel great about our outlook for where we'll be with our total for the year and where we'll be for our earnings for the year.

(Operator Instructions) Our next question comes from Jon Andersen with William Blair.

Last but not least. Just following up on Kevin's questions on flea and tick. So could you just remind me, is Q1 more of a set the shelf quarter for flea and tick and then Q2 is a replenishment order quarter based on demand trends as you get further into the season? And it sounds like from what you've said and correct me if I'm wrong, that 1.5 months into Q2 here, you're seeing healthy replenishment activity and you're feeling good about kind of double-digit organic growth in the product side of your business on a full year basis? Is that a fair characterization?

Yes. I think, John, what we're saying is, we have, from a sales perspective, a record quarter, with information from our desk looking at how the business is performing that the company will have a record year. Flea and tick is a significant contributor. And flea and tick goes across our prescription drug business. It goes across measured and it goes across unmeasured accounts. First quarter, we do get to get stores back up to ready for season inventory levels. So there is a sense of fill the shelves. But you're talking about taking stores that will have 2 pieces on hand up to 4 pieces on hand. And so the amount of fill that happens then isn't -- it isn't like a new fill from empty to full, it's just increasing weeks of supply and it can slowly build and continue to build during Q2. The Nielsen data through the end of Q1 had consumption in Q1, through the register on measured accounts, of $93 million. Last year, for the same quarter, it was a $114 million. And that's across liquid drops, that's across collars, powders, everything that would be measured in that flea and tick. When you think about just between what happened in the first 3 months of the year and what happened through April, the consumption jumped $32 million because of just that ramping of the season. But last year, it jumped $45 million for the same time period. So there definitely is that now -- we now see, as we start seeing every single week, it's more and more and more consumption. And we typically see peak week for consumption for flea and tick being around the 4th of July. But we still get great numbers all the way through the fall and even into fourth quarter from a season standpoint. So right now, our unmeasured accounts are outpacing growth rate and volume contribution than are measured accounts. Our measured accounts have had a tough start to the season. And if you look at the profile of the Walmart shopper and some of the other people out there, it can make sense, I think, in a lot of ways. But we've seen their number bounce back significantly and all of our measured accounts bounce back significantly. And as I said earlier, last Friday was the largest single day of orders we had for replenishment inventory in the flea and tick category in the history of the company. So I think it's a great sign of what we're seeing going through the register and what we're seeing coming from the orders and what you said as far as having a tremendous amount of confidence in continuing to have the growth rates in the product segment of our business. We fully believe we will continue, and we expect to have a great rest of the year.

Great. That's really helpful. Shifting to services. Any -- it's very early days, any learnings so far with the wellness centers that you've set up? And then, it sounds like you're going to market under 2 different banners. I wasn't quite clear on that, but could you talk about if that -- why 2 different banners? And is the service offering the same, it's just tailored for different retailers? Trying to get a sense for that.

Yes. I think for those that have known us for a long time, we've always maintained a channel strategy that had brands to support different channels. And we've learned that our brand that VIP has used in the past, which is the VIP Petcare brand has been where they've operated wellness centers in pet specialty retailers like PetSmart and Pet Valu and Pet Food Express and Tractor Supply. And we will continue to support a list of retailers with the VIP Petcare brand and continue to expand back as we find the right locations and the right support from the retailers to support expanding the VIP brand. The VetIQ brand is a brand that we've introduced to support expanding wellness centers in more our traditional retailers, the PetIQ legacy retailers, like Walmart, where we've opened up our first 2 locations in Q1 and another 9 locations so far in Q2. And we'll have 20 locations under the VetIQ brand by the end of second quarter. And we'll maintain those 2 brands going forward. The services that we offer are our wellness services, which means the service list is very similar between both banners and so you can find the same great quality service in both places, both banners. We use the same training programs to support how the veterinarians are in bulk (inaudible) are supported.

In the services business, given the seasonality, does Q1 -- obviously is more of a trough quarter in terms of profitability. Is Q4 similar? And then really the profit in that business was all derived within Q2 and Q3?

Yes, John, that's a correct way of looking at it. It is seasonal in nature, the services piece of it. And we did communicate previously that it's really a pretty close to a breakeven model in Q1 and Q4, with a significant amount of the earnings occurring through the middle of the year.

Okay. Last one from me. And you've had this in your prepared remarks, I just want to make sure I got it right. The plan to get to a 1,000 health and wellness centers, you plan to self-fund that through internal cash flow, debt capacity that you have. There is not a need to go to an outside the company for funding in order to execute the 5-year plan. Is that accurate?

Yes. That's a correct statement, John. And that's a good question. When we put together the model, we did it all predicated based off of self-generated funds. So obviously, if the day comes that we want to escalate that model, that's a high-class problem to have, and we'll make the right decisions as to how we want to fund it at that point if we were to. But to be able to handle the organic growth with the 1,000 clinics that we're talking about -- or wellness centers that we're talking about, that's all based off of self-generated funds.

Our next question comes from Joe Altobello with Raymond James.

This is [Sarah] on for Joe. So I was wondering, are you guys going to continue to operate the pop-up clinics or will these be phased out?

Thanks for the question. We have no intention of changing our, what we call, community clinics. Those are clinics that we -- pop-up stores, store within a store, where we are going out to a retail location, 1 day a week, 1 day a month, a couple days a month and operating those services. Today, VIP is supporting pop-up clinics in over 2,000 retail locations and we'll run -- I think in 2017, we had a little over 72,000 pop-up clinics that we operate in. We will grow the number of pop-up clinics that we will run in 2018 and see it as a continued growth opportunity for us in the future.

Okay. And then did your guidance still contemplate the revenue impact and not the EBITDA impact in the clinics opening this year? And what is the expected EBITDA impact from the 20 to 30 clinics opening this year?

You're talking about the 20 VetIQ clinics? Yes. So we will talk about this on a go forward basis as same-store sales versus prior year. So we'll give you what the total sales are to include the wellness centers and then we'll back out anything that's been open less than 1 year. And for comparative purposes, that's what we'll compare ourselves to. And as May [they] anniversary, we'll fold those in.

(Operator Instructions) We have a follow-up question from Brian Nagel.

I wanted to follow up with the question on the clinics. So in the 20 clinics we're opening here in the next, I guess, several weeks or so. How should we think about -- I know you've given guidance in the longer -- the guidance for the year within the context of longer-term guidance. But how should we think about the revenue ramp at these clinics, at least initially? And the second question is what you have (inaudible) is there going to be some type of significant marketing campaign that's going to sort of say help you get through to those revenue numbers?

Brian, your first question, you kind of blurred out. I think the question you asked was what is the short-term EBITDA and kind of revenue impact from the clinics. Is that correct, is that what you asked?

No. What I'm asking is how should we think about, in year 1, the revenue ramp of these clinics. You've talked about what we should expect for the sales. But how is that going to ramp initially?

Yes. I think we've given you kind of a 1 year what we believe the inventory -- or the revenue is going to be. It's roughly $375,000 in year 1. We, right now, are seeing about 20% of that revenue number in product and 80% of it in services. And we're literally modeling them from month 1 being no business at all to where it slowly ramps every month until we get to month 18 and we hit maturity, which I don't have the number in front of me, I think it's $640,000 at maturity. And during year 1, we show that we'll generate negative contribution margin of about $25,000 in year 1 from a contribution standpoint. But depreciation virtually offsets that to where it should be, on an annualized basis, about a net neutral to EBITDA.

Okay. So then, the second question I had -- I'm sorry.

The second question you had around what are we doing from a marketing standpoint. And we obviously have got a strategy where we open the clinics for roughly about a month to deal with any timing and getting our building permits and our people trained and making sure that we've hit an operating level of confidence before we grand open the location. So we're trying to grand open the locations on roughly week 5. Now week 5, we have a huge Saturday event. We typically have everything from offering some incentives, an item and a price that people can't say no to, to come in and just really understand who we are and what we do. And then we're doing a number of other things relative to grand opening that we're going to keep in place through the full year to include customer intercepts in the pet aisle, signage programs across the Walmart store, both inside and out. We have community outreach programs where we're able to hit and target both from a social media standpoint by ZIP Code and from a mailer by ZIP Code. So I think we've got some pretty well-thought-out plans, plans we've seen work in the past in our past lives of operating similar type facilities and what we've seen work in VIP's historical experience. So I think we've got a great plan. We're going to tweak them and we're going to learn best practices and hopefully get better and hopefully shorten that acceleration time to maturity closer to the 13 versus the 18 months. But we feel very good about where we sit today on where we're going. And all of those marketing plans are budgeted into those initial investments and into the P&L that we've disclosed.

At this time, I would like to turn the call back over to Mr. Christensen for closing comments.

Well, we thank you, everybody, for joining us today. Obviously, there's been a lot of hard work done here on our side of the table to deliver the results we had this quarter. And you can tell from our enthusiasm for the business, we're very excited about the momentum and the momentum gain that we see across the total company and couldn't be more excited with the results that we've been able to achieve in this quarter and what we expect out of the rest of the year. We look forward to talking to you again in a few months as we are able to report the results from Q2. And look forward to interacting with all of you as we see you at various conferences and things over the next few months. And I thank you, again, for coming today, and I appreciate all of your support.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.