PetIQ Inc (PETQ) 2018 Q2 法說會逐字稿

Greetings, and welcome to PetIQ Second 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, Katie Turner from ICR.

Thank you. Good afternoon, and thank you for joining us on PetIQ's Second 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 beliefs and involve risks 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 or on Form 10-K for the year ended December 31, 2017, the Form 10-Q for the period ended March 31, 2018 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 among others. 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.

In addition, PetIQ has posted a second quarter 2018 supplemental presentation on our website for reference. And now I'd like to turn the call over to Cord Christensen, Chairman and Chief Executive Officer.

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

We continue to experience broad-based strength across our diversified products and services business model during the second quarter. Our team's strong execution enabled us to generate record quarterly net sales of $171.1 million, a 96% increase over Q2 of 2017 and adjusted EBITDA of $15.8 million. Net sales were above the high end of the second quarter outlook we provided in April. Adjusted EBITDA was in line with our expectations as we capitalized on opportunities to grow with our Animal Health Partners and drove incremental sales of distributed products. This resulted in a shift of a product sales mix in the quarter but had no effect on our gross margin dollars. Overall, we are extremely pleased with our business momentum, enabling us to raise our net sales outlook for the year.

Our results also illustrated that, as the weather got warmer across the country, our flea and tick business improved. This fueled a Q2 sequential net sales improvement from trends we saw in Q1. According to Nielsen measured channels data through April 21, 2018, the flea and tick category was down 21%. But as of July 14, 2018, the measured channel showed incremental improvement of flea and tick to be down 12%. PetIQ's result outpaced this result over the same period. Our brands performed better than the overall market, nonmeasured channels were up meaningfully, and our prescription drug, flea and tick, was up significantly and in line with the macro trends in the broader veterinarian market. Keep in mind, for PetIQ, only 38% of our sales year-to-date were in Nielsen-measured sales channels. The 62% of our sales that were in unmeasured sales channels dramatically outpaced the measured flea and tick sales channel. In addition, during the second quarter, we gained over 4,500 new points of distribution in brick-and-mortar locations across food, drug and mass, farm and feed and independent pet sales channels. We continue to see solid increases in both skew velocity and distribution with our business spanning over 700-plus items, 7 different categories and consisting of one of the most diversified customer bases in the industry. We believe PetIQ is well-positioned for future growth and success.

This includes increasing opportunity for us to participate in a rapidly growing e-commerce sales channel. For Q2, e-commerce generated the highest channel growth rate for the 6th consecutive quarter, growing at a faster rate than the overall company growth rate. We're also very excited to have the opportunity to grow with one of our e-commerce partners in a more meaningful way through the addition of our pet prescription products. This expanded relationship started July 1, we believe this reinforces our optimism for this category over time. For second quarter, our prescription drug program continued to have the highest product category growth rate of all of our product categories. More consumers are using our pharmacies to fill their scripts and a significant number of pet parents are using chewable prescription flea and tick products instead of OTC options. We continue to be a trusted partner for both e-commerce and brick-and-mortar go-to-market strategies with a strong runway for future growth across all sales channels.

For the second quarter, we opened 17 wellness centers for a total of 20 wellness centers opened year-to-date, right in line with our stated plan. In total, we were operating 29 wellness centers at the end of Q2, including our newly opened PetIQ locations and VIP's existing wellness centers. Our team did a tremendous job managing and executing these new unit openings both on time and under budget. These new wellness centers are located in diverse geographies and across markets with varying socioeconomic populations, including the states of Arkansas, Oklahoma, Missouri, Pennsylvania, North Carolina and Oregon. We believe this new installation base will provide us with excellent learnings and prospective as we prepare to open future locations in 2019 and beyond. We also opened 3 regional offices in Q2 with 34 regional offices in operation as of the quarter end. With field offices, we have an expert staff with strong operational controls in veterinary and community relationships across our country. PetIQ is uniquely positioned to continue to expand our veterinarian care model across the country. To support our future growth, we have initiated a plan to start searching for and retaining the best talent. We believe this is the right time to strategically invest in people as we further build an experienced animal health and wellness team focused on the expansion of our Follow the Pets growth initiatives. We believe our pet services and product offering will continue to generate value for our pet parents, Animal Health Partners and retail partners alike. At PetIQ we are driving new sales and adding an incremental traffic driver for our retail partners, helping the animal health industry grow faster by accessing the highest concentration of pets that never go to the veterinarian, and ultimately, all this will also fuel shareholder value.

In the second quarter, we implemented best practices across our organizations through our ongoing integration of VIP. We have made a lot of progress, including changes to help increase profitability of the service segment. As we mentioned on our call last quarter, we identified approximately 370 host mobile clinic locations that we discontinued in Q2. We experienced immediate benefits to our average pets per clinic and revenue dollars per pet while eliminating operating costs. In Q3, we have started focusing on enhancing operational excellence in-store and within our VetIQ wellness centers. This includes greater emphasis on demand creation through marketing initiatives to include retail partner engagements, in-store signage and localized target marketing to pet parents. We expect that additional performance improvements will be realized as we increase headcounts and revenue per pet while optimizing our operational cost through the balance of 2018.

We believe we are in the early innings of our Follow the Pets long-term strategic growth initiative. Today, approximately 86% of pet owners purchase their pet food at our retail partners and pet households are at its highest levels driven by millennials, now the largest segment of pet parents. According to the American Pet Association, 48% of households have a dog and 38% of households have a cat. And according to Packaged Facts, there are 67 million U.S. households with pets across the country. We believe these favorable industry fundamentals support our stated plan to open at least 1,000 veterinarian health and wellness centers by the end of 2023 with our retail partners. 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 have the opportunity to take advantage of 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 pet health care.

Before I turn the call over to John, I'm also pleased to announce a positive development on the legal front. On August 3, a federal judge dismissed the antitrust complaints filed against PetIQ by Med Vets, Inc. and Bay Medical, LLC. We have a long history of acting responsibly within the industry, and this remains a cornerstone of our culture here at PetIQ. Litigation is a component of today's business environment, and while we do not seek this out, it is our intention to remain vigilant in our defending our company whenever necessary. Our record of accomplishment in this regard speaks for itself, and we are pleased to have this matter behind us.

Our mission to make pets' lives better with more affordable and accessible veterinarian services and products has never been stronger. We believe our category leadership, broad product portfolio, compelling service offerings, value proposition and strong customer relationships will continue to fuel our future growth and value 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. Our second quarter financial results reflect our team's ability to deliver on the financial targets we have provided on our business update call in early April. As Cord mentioned, our differentiated product and services offerings is supported by attractive macro trends. We believe our market-leading position, strong partner relationships and favorable industry fundamentals will continue to fuel our future growth. Before I get into our quarterly results in more detail, I wanted to mention that beginning in second quarter of 2018, we are providing additional non-GAAP financial information, which, we believe, provides investors with additional insight into and measurement of our recent entry into the veterinarian services following the acquisition of VIP in January of this year. This is consistent with the guidance that we provided during our April modeling call and our first quarter earnings call.

The essence of these adjustments are to exclude any non-same-store service revenue and profit contribution, positive or negative, along with the launch or preopening expenses, so investors can understand the underlying performance of the base business, while also having a clear understanding of the contributions provided by the veterinarian wellness centers. We also intend to provide a same-store sales metric in the future as these veterinary retail service centers mature and move into the comparable store basis.

The adjustments are detailed in today's earnings press release and in the supplemental presentation that is posted on our Investor Relations website for your convenience.

Second quarter 2018 consolidated net sales were $171.1 million, an increase of $84 million or 96% over the second quarter of 2017. Second quarter adjusted net sales were $170.3 million. Similar to the first quarter, our strong organic growth was primarily driven by further penetration of existing accounts with distributed products and new customer wins. VIP revenue contribution in the services segment makes up the balance of the reported year-over-year growth in the second quarter. Product segment net sales for the second quarter were $148.7 million, an increase of 71% year-over-year. Segment operating income was $16.2 million, an increase of about 63% compared to Q2 last year. We continue to have excellent traction within the distributed business, and are focusing our efforts on establishing new customer relationships. We have been communicating our expectations for ongoing mix shift towards distributed products. This shift was higher than anticipated during the second quarter.

Service segment net revenues for the second quarter were $22.4 million, an increase of 11% versus the prior-year period on a pro forma basis. This assumes that we owned VIP in the year ago period. On an adjusted basis, excluding non-same-store contributions from our wellness centers and regions, service segment net revenues were $21.6 million, an increase of 7%. Service segment operating income was $2 million. As Cord mentioned, the base services segment continues to generate solid results following some of the changes we implemented in Q2. We remain confident about building the business from here as well as expanding our retail presence with the addition of new wellness centers in 2019 and beyond.

Second quarter 2018 adjusted EBITDA of $15.8 million and adjusted EBITDA margin of 9.2% was in line with our April guidance. Year-to-date adjusted EBITDA was $21.4 million, $400,000 better than previously provided guidance. Second quarter 2018 gross profit was $26.3 million on a GAAP basis, or 15.4% as a percentage of net sales compared to $16 million or 18.3% as a percentage of net sales in the same period last year.

Adjusted gross profit was $28.1 million and adjusted gross profit margin for the quarter was 16.4%. As I mentioned, gross margin was impacted by a shift towards distributed product, which accelerated at a greater rate than expected during the second quarter, but gross profit dollars were consistent with expectations.

Second quarter 2018 general and administrative expense was $16.9 million on a GAAP basis or 9.9%. Adjusted G&A was $15.5 million or 9%. Here are a few additional considerations of note on G&A as you think about our larger business. As a result of the acquisition of VIP in January of 2018, it is difficult to review direct comparisons to the reported year ago period, as they are not comparable on an apples-to-apples basis. I would highlight, though, that we continue to achieve expense leverage. For example, legacy PetIQ G&A increased $36,000 year-over-year during the second quarter, while product revenues increased $61 million during the same period. Net income was $5.4 million for the second quarter of 2018 compared to $6.1 million for the prior-year period. Adjusted net income for the second quarter was $10.6 million. Turning now to the balance sheet. We have improved our balance sheet significantly with pro forma liquidity of $63 million, including cash and borrowing capacity compared to $12 million at the end of Q1. We have generated significant earnings, improved our trade terms with our supplier partners, collected receivables in line with sales and amended our credit facility to expand capacity. All of which has significantly improved our balance sheet and flexibility. Compared to December 31, 2017, our cash was down from $37.9 million to $11.7 million, and long-term debt is up from $17.2 million to $107.4 million, largely to the purchase of VIP.

We continue to feel comfortable with our current capital structure and believe we are well-positioned to fund our growth plan. Now onto our 2018 outlook. We are raising our full year 2018 net sales expectation that has been in place since the announcement of the VIP acquisition in early January. Specifically, we're expecting full year 2018 net sales to come in at approximately $500 million, the top of the previously communicated range, representing an increase of 88% year-over-year. We are reiterating our 2018 adjusted EBITDA guidance in the range of $40 million to $45 million, which represents an increase of 79% to 102% year-over-year. In closing, we are very pleased with our second quarter results and remain excited about our future growth prospects.

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

(Operator Instructions) Our first question is from Jon Andersen with William Blair.

Lots to ask here but I'll try and keep it pretty brief period. So, Cord, you quoted some Nielsen data on the flea and tick category, which, again it sounds like has gotten sequentially better as the weather has turned. Can you talk a little bit about your performance in measured channels on kind of apples-to-apples basis? I understand that you've seen some outsized growth as a result of the heavy exposure to nonmeasured channels, and also the growth of your prescription business. But with respect to, kind of, the measured channel, how are your brands are performing relative to that sell-through metric? And how are you feeling about kind of inventory levels as you move through the balance of the season?

Thanks, Jon, for the question. That's a great question. I've mentioned briefly in the script that we discovered today that there was a number of reason why our numbers were so strong. One of those is, in those measured channels, the brands that we support outperformed the broader market, and said differently there was really a few significant losers, from a brand perspective, in the market that really drove that number where it was, and if you were to isolate and take those specific brands out of it, which wouldn't include our brands, we would have been almost twice as good as the overall market in the measured channels. No doubt, we're still seeing some pressure on the topicals as we've seen prescription flea and tick gain distribution, and we've seen nonmeasured channels that include some of the .com retailers that have seen significant increases. But we really feel great about how we performed, the plans we've put in place and our operations team and how they have executed to keep us in a great position. We did see, coming out of the first quarter, where people were conservative on their inventory levels that people increased inventory in second quarter to get to levels that said they were expecting a compressed season and wanted to be in the right inventory levels. They've maintained the right weeks of supply based on sell-through. No one has really arbitrarily pushed inventories up, but the real question for the rest of the year is going to be when does the season start to fall off and when do the retailers decide to start taking their inventory levels down? The guidance we've given has projected a normal season and a normal activity from the retailers on their inventory levels. And then we have no reason to believe it will be any different than that, and we believe we've been conservative with the guidance that we've given to capture our ability to perform against that guidance. So we're pretty excited about how we're performing. We're definitely excited about the diversification we have across all aspects of the business and across all our customer channels. And so I think we feel great about how we're participating and the general protection that we have as a company in the market.

Great. Can I ask about -- kind of piece this a little bit with some comments around the e-commerce part of your business. I don't know if you're willing to disclose it, but can you, if possible, talk about maybe how big that piece of the business is relative to your overall sales at present? And then it sounds like you have a significant new opportunity on the prescription side with a large pure play. Can you talk a little bit more about that?

Yes, Jon. We really aren't prepared today to disclose specific percentages of the size of the e-commerce space on the call. I'll tell you as we've messaged in your conference and others, we continue to see significant gains in people choosing to do business there and we're grateful that we've been able to have the right amount of presence there to participate in that. So it's been a significant part of it. And as we said, it's the 6th quarter in a row, e-commerce has grown at a better rate than the other categories and other channels. And we've seen, obviously, in the categorial products side of the business, the prescription drugs business has been our best growing segment overall. I've messaged a number of times over the last quarter that we were going to be participating with a significant online prescription drug program that we expected to launch around the 1st of July. The retailer has asked us not to talk specifically about them in our open communications, but those of you who follow the market are very aware of who launched the 1st of July, and their presence in the market has been one of the most significant online pet retailers in the country, and we are very grateful for our relationship there and the contribution that we're seeing it get [placed]. It didn't launch until July, so we had small fill orders that took place in June. The good news about online retailers, they don't need to stop inventory across thousands of stores. They just need what they're anticipating 4 weeks of sales are. So we do feel like what we're seeing is actual consumption rate at this point and look forward to it, and we've included that -- those numbers and what we believe is a conservative estimate for their participation at the back half of the year, the guidance that we provided today.

Okay. Last one for me and I'll get back into the queue. On your service side of your business, can you talk about with the clinics that you've stood up this year at Walmart and I think maybe -- mostly Walmart, can you talk about what you experienced so far relative to the cost of getting those up and running, your ability to staff them up at appropriate levels? And some of the initial kind of uptake you've seen from consumers? It sounds like at least on the last point, you're kind of taking the next step and looking to drive traffic through some incremental marketing spending. But if you can talk about, again, the costs, the staffing, operational aspects and then the kind of the uptake you've seen so far?

Yes. I'll think, I'll let John talk about the initial kind of launch expenses that we messaged back in our April guidance, and then I'll answer your question relative to the kind of staffing and operational things after he gets through that.

Yes. We've projected our capital spend to be at $130,000 per unit with preopening expenses of $70,000 per unit with a total spend of $2,000 per...

200.

Excuse me, $200,000 per -- our actual spend has been $98,000 in capital expenses. We have $105,000 in launch expenses for a total spend of $203,000 per unit. So with that, the total spend per unit is absolutely in line with what we have projected. However, there are some geographies with that, and so I will turn it back to Cord to talk about some of the launch expenses.

I think John's comment, we emphasize getting the locations opened on time, making sure they are operational ready, and we definitely didn't put our normal cultural or philosophical training around controlling every expense. And we've definitely learned that we can do a better job on some of the controllables. But that these first 20s didn't need to be there and feel absolutely that the go-forward guidance for more locations will be in line with those initial estimates. One of the things that I think we learned positively is there's great people across the country that work in the [vet] VIP offices and [wire side vet] operational expertise spread out across the country in the vet community that they access on a regional basis. It really puts us at a key advantage of being able to do what we did, which is stand-up locations across so many different states and markets and do it effectively. And we've had great feedback from the operation thus far. So those are the positives, I think, we're excited about it. We have looked at it and believe strongly that we're on the right path and believe we'll be letting you know some key hires that we're adding to the team to strengthen our bandwidth that they're preparing for what we think the future will bring. And we have not made a decision to how fast will we be going in 2019. We have made the decision that there will be more in '19, and we expect to give you a kind of size and breadth and depth of that probably closer to third quarter earnings releases. But I believe, before the third quarter, at least you'll hear about some key hires to strength our commitment to this space. One of the learnings, I think, on the side is we might have probably been over zealous on was the VIP wellness centers were built in locations that they have been running weekly or monthly mobile clinics. And we underestimated just what a great starting point it is to already have a base clientele there and familiarity to a customer base that you're there, and we're starting from ground zero. So we're seeing that we're going to work a little bit harder for the initial launch from marketing perspective, but definitely believe we've got the right team with the right plans and are seeing the right things out of the build on those locations, and feel great about the future.

Our next question is from Brian Nagel with Oppenheimer & Co.

So the first question I have for -- both you and John discussed the -- I guess, I'd say somewhat -- to some extent the disconnect in your results here with sales and gross -- and -- on the EBIDTA side. You mentioned that it had to do with, I guess, greater sales of your distributed product. Can you explain further what that was? And then how we should think about that (inaudible) going forward?

I think -- I'll give you an example, and then I'll let John kind of give you more a specific kind of margin, a G&A leverage example. So if you look at our flea and tick category on the OTC side, we've had a historical mix in how those products have been purchased in tens of thousands of locations over the last 5 years. And that historical mix, we've continued to believe it would be the same. And one key difference is, in 2018, and for second quarter, which is really peak season and definitely the first quarter of this year's season, it's the first time ever that we've had our partners in the animal health companies actively doing a great job supporting their products and their items and being organized in it. And we projected that, that support would create a certain mix that would create a certain result. So when we sell one of those distributed boxes, a 3-month supply on our wholesale revenue basis, it was a roughly $32 wholesale for us. The generic version that we manufacture is roughly a $10 to $12 price for the same 3-month supply. Yet our penny profit or our $1 per box is roughly the same, Brian. So what we've seen is, we had very aggressive projections on what we felt we would grow in units this year, in that category and how we would see our participation in the flea and tick category continue to show the growth rates that we've messaged in the past and that is absolutely what took place. What we've seen differently is, is we've sold more $32 boxes than $10 boxes. And so that's why when you look at our gross margin dollars for the quarter, they are right in line with what we thought we would have, because the margins were agnostic, and why the EBIDTA number is online with that is we really did get our growth rate -- our unit growth rate but the mix is a little bit different. And John, if you want to go through some of...

Yes, so I think just to drive home that last point is, our overall unit sales were -- and our margins are -- category margins were absolutely in line with our projections for the quarter. To illustrate Cord's point, if we had sold the same volume of product on our projected mix, we would have had a product sales for the quarter of $131 million versus what we have [reiterated] that we've communicated. With the gross margin percentage of 16.1% on product, realized in the same gross margin dollars, first half would have been approximately $222 million in product revenue with the 15.5% margin. When you layer in our service margin -- revenue and margin in our overall sales for the quarter, in first half it would have been $153 million and $260 million, respectively, with overall margin percents of 18.4% for the quarter and 17.6% for the first half. Furthermore, you can't look at margin without considering the G&A. We continue to leverage our fixed G&A with every incremental product sale. For instance, our total product G&A spend for the quarter was up only $36,000 for Q2 of 2018 versus prior year, while our product sales were up $61 million. This illustrates the compounding lift on EBITDA margin with incremental product sales we make. Finally, from a modeling perspective, just to -- just so you can think about this as you go forward, we still have a margin improvement in Q3 and Q4 on our product business of roughly 2% per quarter increase. And that's tied to the seasonal decline of our flea and tick sales in Q3 and Q4, respectively. This has an annualized impact of improving our gross product -- gross profit margin of approximately 1% to 1.5%.

Yes. So I think, Brian, it's something that people need to also remember that we are blazing new trails in the sense that animal health really didn't exist in retail. We have been the pioneer of bringing a complete portfolio. We're doing our best to keep in front of what the mix is going and what the numbers are, but what we know is, we're proving we can sell tens of millions, if not hundreds of millions of dollars of more products with not a significant increase in G&A, and all scenarios lead that the modeling direction with sales growth and EBITDA growth is absolutely in line and supported by what we are producing out there.

I appreciate all the detail on that. The second question I have on the services business, I think maybe a follow-up to the prior question. But did you articulate or could articulate -- I am recognizing it's very, very early in this build out, but just how the volumes are tracking at these -- at the new VIP centers relative to which were planned?

Yes, I think they're tracking where we thought they would track. I mean, I would love to have something someday just blow me away, and dramatically, outperform what our numbers are. But if you look at the mapping we did and the various things we pegged against, it includes the original Walmart clinic we were involved with in and still handle the prescription drugs for down in Florida. Our prescription volumes are in line and some are better and some are at the same level and some are just slightly behind. Our pet counts are growing in line with what we thought the first quarter is. And it's where it needs to be for the first quarter of operation of the business. Obviously, until we get a significant build, which, we think, really hockey sticks around month 7, we're going to be continuing to work hard. We've engaged our retail partners, not just at Walmart but a bunch of places. And we've recently engaged a significant marketing team that has proven to be extremely successful with the other in-store services, just putting them more behind what our plans are. And right now, Brian, we're feeling great about where we're going, and if we didn't feel great, we wouldn't out starting to interview and likely to make some really key hires to strengthen the team so that we just have every resource available to push this forward.

Our next question is from Joseph Altobello with Raymond James.

The first question. I kind of want to go back to VIP for a second. And if you look at product sales, obviously, up very strong this quarter. How much of that was attributable to VIP? And the number I am trying to get to is sort of what the organic revenue growth number was in the quarter?

Yes, the organic revenue growth for the quarter was 52%.

Okay, great. And I think that's actually an acceleration off of the first quarter. So good to see there. So in terms of the wellness centers, when you open a wellness center, how much of a lift do you typically see in terms of product sales in that store that you open the center? And obviously, it's early days, but I'm just curious what kind of uplift you're seeing on the product side?

The early day, not a lot, Joe. It takes some time for that veterinarian to start to influence the consumer to see things out in the OTC aisle start to be influenced. What we see an immediate impact to is the attachment rate of prescription drugs in the pharmacy. And then we've been very good understanding what the formulary needs to be, how to run the inventory, and how to be in a position to capture that business. And I think we've messaged all along that we see the prescription drug attachment revenue to be somewhere around 20% of the total revenue that we generate. So it's not insignificant. I mean, our highest performing pharmacy in the country is a pharmacy that's going on almost a 24-month attachment to a clinic that exists in the Walmart location. So we know the value of that increase, and we do see some increase in the OTC side of the business, but it takes more time for it to stick. So the initial increase is not something that we model into our guidance or into our business. We let that happen as it happens. But the pharmacy business, we keep very close tabs on and making sure the right formulary and the right products available for that to run smooth.

Okay. That's helpful. And just one last one, if I could. I think you guys mentioned that you added about 4,500 doors this quarter. How much of those doors were new customers? How much of those doors were existing customers where you got additional facing?

So that was true, all new doors. And we really have never tracked or told you when we had just door gains inside of an existing customer. We do gain that as well, but this was actually new distribution for the company. We talked about it when we met with you guys a quarter ago that we had some movement, but the reality for when the reset took place in the first shipments, it was in second quarter.

(Operator Instructions) Our next question is from Bill Chappell with SunTrust Robinson Humphrey.

Just looking at the raised guidance, which I am all for, but compared to kind of your original guidance of back in January, I don't think this $450 million included closing down a fair amount of VIP existing businesses, and I don't think the EBIDTA included kind of adding a marketing team behind that. So it seems like the business is even stronger or the guidance is even stronger than maybe what we're looking at. Am I looking at that right?

Yes, Bill, you are dead on. And that's something that we probably don't talk about as much as we should is that guidance did include what our original projections over on the services side of the business and does not reflect the closures that were made.

Yes, we definitely, Bill, had upwards of $20 million of sales that we eliminated as -- when we did that. And if we would've had those numbers, you would've seen obviously the trendline even further, and obviously, the expenses that you talked about also are something that we've absorbed. So we haven't gone back and tried to change that guidance, because we feel like we can still show obviously we're going to deliver against it. We would have loved to have that additional performance, but it was the right thing to do for the business, and we're very happy with those decisions that we've made.

Got it. And then on the VIP side, am I -- I understand that you're kind of done for this year on, I guess, the Walmart rollouts. But in terms of other doors, be it Tractor Supply or other things, are you restarting or reopening that? Or is that on hold as well? And then when do you think we would get a -- or when do you kind of need to have an idea for the 2019 rollout?

Yes, I think couple of different questions there and I really appreciate both those questions. They are great questions. The second question you asked first. I mean, to push the peddle all the way to the floor, we've always said, we'd like to see the results and the building taking place in Q3 and be in a position at the end of Q3 to really say just how big is it going to take place. We have our team actively doing work now. We will see openings in 2019. We are making key hires to support it, and we're excited about 2019. I think we feel strongly. We have the right strategic direction for the business, and it's going the right place. The first question you asked was the right real estate decisions for new locations with what is one of our most available partners with Tractor Supply and Pet Food Express and some others all have openings that were scheduled, and we didn't slow those down. I mean, we have a number of locations we will still open between now and end of the year. We have new locations we're operating mobile clinics at with PetSmart that's new as of second quarter, and we're continuing to see that build and increase in size and scope. And so there is lots of great things to talk about. It's just right now, we talked a lot about the new shiny rock but the old rock is really shiny too, and it's got a great momentum and it's continuing to work. And like I said, just basic principles of how you judge success and monitor success and bring back results and report cards to regional offices and regional managers and show them the right things that measure success, those are all things that we've already implemented and we're seeing better decision-making already across the company. So we're really excited, Bill, about what we see for the back half of the year, and we're excited about the work we're doing to support 2019 already.

Got it. And last one for me. Just on the wellness canters again. Any change in kind of in terms of the math of start-up expenses and CapEx needed to start up each one, now that you've done 20 or so?

I think the first thing I like to appreciate is we threw the kitchen sink at these as far as labor, labor hours, opening. And what we did determine is you don't have to run 60, 70 hours in every location. There's plenty of markets that you can run 40 hours. There's plenty of markets that you can put in typical retail labor controls. I mean, John and I have grown up in grocery chains where everything is so controlled that we know how to do that, and we definitely felt like even this first 20, we understand better than ever what controls are there. I think what we've determined is the overall investment will be in line with the $200,000 or less. Where we were a little bit off is the capital budget is going to be slightly less and the opening budgets are going to be a little bit higher and the difference is there really is a month 0 that you have to deal with, it's in that opening expense that is just part of it that we missed a little bit because of the VIP business that ran their business off of existing mobile clinics and people familiar with the store. And so -- but we still feel very comfortable about the [controllables] and now putting our operators hat on and running the business that we should see the guidance we've given around what that investment is going to be, really in line and we believe better than the $200,000 that we messaged in the April presentation on Slide 14. I think we're very optimistic. We've got great people, we've already integrated a good mix of the existing team and our team from here, bringing over some retail control and operator mentality that I think is stronger on our side. And we really are excited about leveraging VIP's culture of understanding how to get the right environment for the pet and the pet parent and making the operating experience just really great. So I think that good mix is going to give us a great kind of philosophical base on how we're going to be moving forward.

We now have a follow-up question from Jon Andersen with William Blair.

These are couple of just clarification questions, probably for John. First on the organic sales that you mentioned earlier, 52% in the quarter. Was that for the company overall? Or was that for the products business specifically?

That was specifically products business, Jon.

Okay. And then separately, you made some comments about product margins. I think gross margins in Q3 and Q4 being up I believe about 200 basis points, and that -- could you just talk a little bit more -- were you referring to -- is that sequential improvement? Year-over-year improvement? What's the base that we're kind of comparing that, I guess, kind of margin -- in terms of the margins?

Those are a sequential improvement over Q2. Before profit margins, specifically.

Ladies and gentlemen, we've reached the end of our question-and-answer session. I would like to turn the call back over to Cord Christensen for closing remarks.

Obviously guys, we enjoy our interaction with you and your questions. They're all great questions. We appreciate the opportunity to have time with you and interact with you, obviously, we're really excited about our employees and how hard they're working, the results that they are delivering. We're excited about our partnerships with our vendor partners and Animal Health Partners that have helped us position the company to provide better pet health care for pets and access the market that we best serve. And we're getting more and more excited about the protection and moat we continue to build around the company as we move forward, focused and aggressively pushing our mission forward. So we appreciate the opportunity to report our results from second quarter, our time with you here today. We appreciate all of you and those of you that are our shareholders out there, and we look forward to doing this again in 3 months and having another great quarter to talk about for Q3. Thank you everybody and have a great the rest of your day.

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