PetIQ Inc (PETQ) 2018 Q3 法說會逐字稿

Greetings, and welcome to the PetIQ Third Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Katie Turner with ICR. Please go ahead.

Thank you. Good afternoon, and thank you for joining us on PetIQ's Third Quarter 2018 Earnings Conference Call. On today's call are Cord Christensen, Chairman and Chief Executive Officer; and John Newland, Chief Financial Officer; Susan Sholtis, President, will also be available for Q&A.

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 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 gross profit, adjusted G&A, 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 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 third 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 third quarter results and discuss the progress we have made on our Follow the Pets long-term growth plan. John will then review our third quarter financial results in more detail and comment on our annual guidance. Finally John, Susan and I will be available to answer your questions.

We are very pleased with our third quarter results. They demonstrate the strength of our diversified product and service business model. Our Follow the Pets growth plan is designed to accelerate PetIQ's rate of growth, enabling us to fulfill our mission of making pets' lives better with more affordable and accessible veterinarian products and services. We are in the early stages of realizing our growth potential, yet for the third quarter, we achieved our highest quarterly year-over-year growth rates in net sales, gross profit and adjusted EBITDA.

We generated record third quarter net sales of $131.4 million, an increase of 117%. Net sales were towards the high end of the quarterly outlook we provided in April. Adjusted EBITDA was $13.4 million, in line with our expectations as we further capitalized on opportunities to grow with our Animal Health Partners and drove incremental sales of distributed products, similar to Q2. This resulted in a shift of our product sales mix in the quarter, but had no effect on our gross margin dollars. Both our adjusted gross profit margin and adjusted EBITDA margin also improved sequentially from the second quarter this year, as a result of less seasonality relative to prior year periods and a strong rate of growth in nonflea and tick products. Overall, we are extremely pleased with our business momentum, enabling us to raise our net sales outlook for the year.

Our third quarter results confirm that we are on track to deliver an accelerated net sales growth in 2018, and we are progressing well towards our long-term financial targets of $1 billion in net sales and 15% adjusted EBITDA margin by 2023. For the third quarter, our flea and tick business performed well and outpaced category growth. According to Nielsen-measured channels dated through September 29, the flea and tick category was down 8%. PetIQ's results outpaced this result in the Nielsen-measured channels over the same period. Our brands performed better than the overall market, nonmeasured sales channels were up meaningfully and our prescription drug flea and tick was up significantly and in line with macro trends in the broader veterinarian market. Keep in mind, for PetIQ, only 37% of our Q3 sales were in Nielsen-measured sales channels. The 63% of our sales that were in unmeasured sales channels, dramatically outpaced the measured flea and tick channels, particularly in the pet specialty, club, e-commerce and Rx sales channels. We continue to see solid increase in both SKU velocity and distribution, with our business spanning over 7-plus -- 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.

As I have mentioned previously, this includes increasing opportunities for us to participate in the rapidly growing e-commerce sales channel. For Q3, e-commerce generated the highest channel growth rate for the seventh consecutive quarter, growing at a much faster rate than the overall company growth rate. We've experienced strong e-commerce growth with key existing retail partners. And starting at the beginning of Q3, we were excited to introduce our pet Rx products to one of our existing e-commerce partners. We have been very pleased with the initial results of this pet Rx rollout and believe this further reinforces our optimism for this category over time.

For Q3, our prescription drug program continued to have the highest product category growth rate of all 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. PetIQ is a trusted partner for both brick-and-mortar and click-and-pick go-to-market strategies with a strong run rate for future growth across all sales channels.

For the third quarter, we opened 2 wellness centers, for a total of 31 wellness centers, including our newly opened VetIQ locations and the VIP's existing wellness centers. We also have 34 regional offices in operation at the end of the third quarter. We continue to be very pleased with our average pets per clinic and revenue dollars per pet from our VIP wellness centers and mobile clinics that have been operating for more than 18 months. Q3 represents the strongest quarter this business has reported. In addition, we are pleased with the improved profitability we have started to generate from lower operating costs at our VIP wellness centers and mobile clinics based on our team's Q2 restructuring efforts to help increase profitability of the service segment. In a short period of time, we have made tremendous improvements to the business and will continue to work on opportunities to gain greater efficiencies through our ongoing integration efforts.

We are also pleased with the 20 new VetIQ clinics we opened in the first half of this year. While our clinic openings were all on time and on budget through Q2, we continued to gain important learnings and perspectives from this new installation base to best understand the appropriate level of staffing, operating hours and pet parent marketing that drives conversion. This will ensure that as these new wellness centers ramp in maturity, they achieve our expectations for sales and profitability. We strategically opened our first 20 VetIQs in diverse geographies and across markets of varying socioeconomic populations to be able to take all of these learnings combined with the knowledge of the legacy VIP wellness centers and support of our regional offices to successfully support their future growth and development and prepare us to open a higher rate of future locations in 2019 and beyond. PetIQ is uniquely positioned to continue to expand our affordable veterinarian care model across the country.

In Q3, we 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 pet counts and revenues per pet, while optimizing our operational costs through the balance of 2018 and into 2019. We are very excited to have added Susan Sholtis to our executive team as President. She has over 20 years of executive experience leading some of the largest animal health and wellness initiatives in the industry. Susan started working with us on October 1, although she has known PetIQ for the last 2 years, including having served as a Director on our Board of Directors this year. It's only been about 45 days since she started, yet she is already providing invaluable perspectives and contributions to our total business and our service segment in particular. Susan will lead several functions for our company, but will be especially focused on our service team as we move forward, and we are fortunate to have a proven, multinational executive with a track record of developing and commercializing pet healthcare and consumer strategies to help us build on our strong foundation and accelerate the growth of our service segment. We have the right team and strategic initiative in place to generate long-term sustainable growth.

We believe our pet services and product offerings will continue to generate value for our pet parents, Animal Health Partners and retail partners like. At PetIQ, we are driving new sales and adding incremental traffic drivers for our retail partners, helping the animal health industry grow faster by accessing the highest concentration of pets that routinely don't go to the veterinarian. And ultimately, all this will fuel shareholder value.

Subsequent to third quarter, on October 17, we completed the strategic acquisition of HBH Enterprises LLC, or HBH. An innovative developer and manufacturer of specialty pet supplements and treats, with them becoming a wholly owned subsidiary of PetIQ. We are excited to welcome HBH to the PetIQ team after working together for several years within our Springville, Utah production facility. This unique partnership has proven to be an important element of our success and bring -- in bringing pet health and wellness solutions to our customers, particularly our OTC consumable products and treats. The acquisition of HBH provides PetIQ with complete strategic control of our manufacturing organization, and the improved business structure will enable us to accelerate growth in this important category. We expect this transaction to be accretive to earnings in 2019.

As we move forward, we continue to believe that we are in the early stages of achieving our growth potential. Through our Follow the Pets long-term plan, our team will continue to strategically execute on disciplined operational initiatives and investments to support PetIQ's long-term sustainable growth as the pace of pet humanization continues to increase. As we have highlighted before, approximately 86% of pet owners purchase their pet's food at our retail partners and pet households are at its highest levels driven by millennials, now the largest generational segment of pet parents. We believe these favorable industry dynamics support our stated plan to open at least 1,000 veterinarian health and wellness centers by the end of 2023 with our retail partners. And with the proceeds from our stock offering that closed in the beginning of Q4, we believe we can accelerate our VetIQ wellness center rollout.

We will follow these pets and pet owners by bringing affordable veterinarian services and products to where they are already shopping for their pets' needs. We have the opportunity to take advantage of the macro trends that are happening in the pet industry, whether it's rising pet ownership, pet humanization and increased aging of pets that all depend on better healthcare. The demand for our more affordable and accessible pet products and veterinarian services is strong, and we remain committed to expand our category leadership position to fuel our future growth and value for our shareholders.

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

Thank you, Cord. We are pleased with our financial results. For the third quarter, our convenient pet products and veterinarian service offerings a compelling value that fueled strong customer and consumer relationships resulting in an accelerated rate of growth.

Third quarter 2018 consolidated net sales were $131.4 million, an increase of $70.8 million or 117% over the third quarter of 2017. Similar to the trends in the first half of 2018, 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 remaining balance of the reported year-over-year growth in the third quarter. Products segment net sales for the third quarter were $108.5 million, an increase of 79% year-over-year. Segment operating income was $14.1 million, an increase of 153% compared to the third quarter last year. We continue to have excellent traction in our distributed business and are focusing our efforts on establishing new customer relationships. Consistent with results in Q1 and Q2 of this year, we experienced an ongoing mix shift toward sales of distributed product during the third quarter compared to the prior year period.

Services segment net revenues for the third quarter were $22.9 million, an increase of 14% versus the prior year period on a pro forma basis, assuming we had owned VIP in the year-ago period. Services segment operating income was $2.3 million. Third quarter 2018-gross profit was $24.2 million on a GAAP basis or 18.4% as a percentage of net sales compared to $12.5 million or 20.7% as a percentage of net sales in the same period last year. Adjusted gross profit was $26.5 million and adjusted gross margin for the quarter was 20.1%. As I mentioned, gross margin was impacted by an ongoing shift towards distributed products, but gross profit dollars were consistent with our expectations.

Third quarter 2018 general and administrative expenses were $17.6 million on a GAAP basis or 13.4%. Adjusted G&A was $16.1 million or 12.2%. Note, we will continue to strategically make disciplined investments in our business to support our future products and services growth.

Third quarter 2018 adjusted EBITDA was $13.4 million and adjusted EBITDA margin was 10.2%. Year-to-date, adjusted EBITDA was $35.1 million, reflecting a margin of 8.4%. Here are a few additional considerations of note on G&A as you think about our 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 as they are not comparable on an apples-to-apples basis. I would highlight though, that we continue to achieve expense leverage. For example, PetIQ G&A increased approximately $400,000 year-over-year during the third quarter, while product revenues increased $48 million during the same year period. Net income was $3.9 million for the third quarter of 2018 compared to net income of $0.9 million for the prior year period. Adjusted net income for the third quarter was $8.2 million.

Now turning to the balance sheet. We believe our liquidity is in great position to address our future growth following the company's successful offering of 2 million shares of primary Class A common stock, which closed just after the end of third quarter, generating net proceeds of approximately $73.5 million. After giving effect to the offering and the related use of proceeds, the company would have had cash and cash equivalents of approximately $78 million as of September 30, 2018. Additionally, as we had mentioned on last quarter's call, we amended our credit agreement in August to increase the revolving credit facility by $25 million to a total availability of $75 million, of which $51 million remained available as of September 30, 2018. Combined, our total liquidity was approximately $129 million including the proceeds from the secondary offering. In connection with the secondary offering, we had an approximate $23 million increase in our deferred tax assets and a total deferred tax asset balance of $41 million. In anticipation of the secondary offering, the selling shareholders converted their Class B LLC interest to Class A shares on a one-for-one basis. This event creates a step-up in basis for these shares and in turn, generates a like amount of tax savings that will benefit all PetIQ shareholders over the next 15 years. This is purely a cash flow item and is not reflected on the income statement.

Additionally, a quick comment on inventory, which ended the third quarter at $77 million and provided a slight seasonal source of cash for the quarter. We are maintaining inventory levels in line with our sales needs. Our day sales outstanding and accounts receivable remain in great shape.

Now onto 2018 outlook. We are raising our full year 2018 net sales to reflect our year-to-date results, including the continued strength we have experienced within our product segment, primarily from the distributed products as well as our outlook for the remainder of the year. Specifically, we are expecting full year 2018 net sales of approximately $515 million, which compares to our previously issued guidance of approximately $500 million. This represents an increase of 93% 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. This reflects the sales mix shift I mentioned previously and new product placement and customer wins in 2018.

In closing, we are very pleased with our third quarter results and remain excited about our future growth prospects. With that overview, I will turn the call back to Cord.

In summary, the pet health and wellness industry remains robust, and we are pleased with our top line momentum and strategic achievements in the third quarter. As we look to 2019, we are very excited about our growth prospects. The majority of our product line reviews are complete, and we believe we are in an excellent position. In addition, our team is nearly complete with the development of our robust VetIQ wellness center 2019 rollout plan. I would like to thank our corporate and sales teams for all of their efforts year-to-date to help us achieve our results. These results and our outlook gives us confidence in our ability to deliver our long-term financial goals. John, Susan and I are now available to take your questions. Operator?

(Operator Instructions) Our first question today is coming from Bill Chappell from SunTrust.

Cord, can you give us a little more color on just kind of the commentary on the store rollout? And when I say, you're shortening it by a year, how does the path look? Does that mean a massive expansion in year 3, a massive expansion in year 2? And is this all primarily Walmart or are you talking about other retailers to get to 1,000 doors?

Yes. Good question, Bill. I think, we've talked to you before that there's a time period to get the team and the machine oiled well and running well to be able to communicate accurately just how we're going to accelerate it. As we've said before, John and I ran similar programs at a major retailer. And after we pushed the pedal down, it took us kind of 12 months to get the cobwebs off. The kind of schedule we were rolling was significantly stronger than what we've previously communicated. The next 12 months will be the toughest 12 months of the schedule just because by the time you take the time to get the results back and information and make the decision that it's worth moving forward, we got to get that machine up and running. We are, at this stage, in enough discussions with enough locations to be in discussions across more than one retailer that we're still trying our best to keep our promises to be between 80 and 120 locations next year. But we'll be able to provide more color on that after the first of the year. We are in negotiations with 5 of our retail partners that we think fit really well. And it will be more than a single retailer program, and we could have a number of them fall out of the negotiations and still be able to hit our goals for next year. But I think you'll see an accelerated schedule by the time we hit 2020, 2021, 2022, those 3 years. I think next year, we're going to be pushing just to meet our original commitment.

Okay. And then on the product side, usually by now you have a pretty good idea of new listings and new distribution for the spring. Can you give us any update there?

Yes. I think -- look, I think we are through the process that we normally would be at this point. We have a few loose ends we're tying up. And I would tell you that we feel great about our 2019 outlook as a business. And we feel like we're on track to continue on the path that leads us to believe that we're still working along the path that we communicated on our long-term growth plans to build towards $1 billion revenue and 15% EBITDA margin. So there's nothing that we see right now in front of us that is going to keep us from continuing to ride the momentum that we see in this category or in the unique protected piece of business that we have is we look at PetIQ and the moat we have around the business and its ability to disproportionately capture growth that's happening through our sales channel. So not ready to give any specifics on specific retailers or distribution, but absolutely confident in our ability to not be in a position we won't see another great year next year like we saw this year.

Got it. And then last one for me. Susan, since you're on the phone, welcome. Can you -- what we constantly hear, I guess, from skeptics is, why would the animal health companies ever want to partner with PetIQ who competes against them? Who used to do gray market type business? You're kind of the case study of someone who not only was on one side but now are on the other side. So maybe you can give us a little color on your relationship background? And then also why you chose to kind of come back and work for PetIQ versus being on the animal health side for so long?

Yes. Thank you for the question. To your point, I'm officially 45 days on the job. And I do want to emphasize, first and foremost, that I continue to be incredibly excited for this business because it only continues to grow and to accelerate. I think, as many of you all know, I've had a relationship with Cord, with John and with the team here for the past couple of years, and they have only continued to build upon their business proposition. And their focus is very much a real and essential need in the marketplace. It's really about bringing in quality, affordable healthcare to pets, to pet parents, where they want to do business. And at the end of the day, I don't see that as a disconnect from our manufacturing partners at all. In fact, I think that it's a quite harmonious relationship and will continue to be moving forward. I also do want to emphasize that my focus, moving forward, is very clear as we progress. It's: number one, to continue to accelerate and dial in our growth model for our clinic business; to ensure that we are mindfully and carefully investing in levers that we know are going to drive demand; and then finally, it's really to make sure that our structure continues to evolve. We've moved -- this organization has moved from having 200 employees to 3,000 employees in record time. And I think it's really important to make sure that we have everybody moving in the same direction and that we have all of the structure in order to meet the business needs, and more specifically, I think, our targets for 2023.

Our next question today is coming from Brian Nagel with Oppenheimer and Company.

So Cord, you obviously discussed a little bit in your prepared comments, just the performance of your initial round of clinics. Maybe a little more color there, just on how you're seeing these -- and again, I recognize it's a short amount of time. But how sales are ramping at these and the underlying expense metrics? Then also maybe discuss we're starting to see at the impact of having the clinic in the Walmart and actually helping to drive better sales of your products within those stores.

Yes. Thanks for the question, Brian. Yes, it's early, Brian, in the schedule. And we are seeing a lot of key metrics improving at the rate that we would expect them to and in line with what we've seen in other clinics. You have an initial phase where you're getting to people know you're there and you're highly promotional in your activity. We've pulled back significantly on our promotional activity to drive conversion from a cost standpoint. And we've seen that our kind of dollars per pet in the new locations have moved up, that they're in line with what we're producing in our legacy business on a per pet basis, which is an exciting to be this early and seeing the revenue per pet hitting the right targets for the business model. Obviously, we announced that clearly knew there was a faster and better way to drive conversions and increase pet count. We have a project that -- marketing project that we call Project Alpha that we launched just recently that was a tie-in to the marketing program we talked about I think recently as we talked with you. And it is a whole different level of how we're engaging the customer and getting to know them and their pets and getting them in our clinics. And that program just started hitting the clinics I think just last week, actually. And already this week, we're seeing that type of things out of it. And obviously, Susan being the marketing expert she is and the animal health expert she is and the team that was already in place that did the IP and the work that they've done, it's getting nothing but better from here. So nothing's changed. It's early but the progress is the right progress. And it's absolutely in line with the ability for us to go to our board and have confidence that we can start moving forward with driving a much bigger footprint out across the country. Again, I think we've also learned a lot about -- as you put locations into a funnel, we've got probably close to 500 stores we've identified across the 5 partners that are in the funnel right now that we're working through and to get to the next phase of our development schedule. And we're definitely -- learnings we did from the first one where we said, hey, we're going to prove that we can open up locations anywhere quickly and affordably with the way our regional office structure is. We're definitely concentrating our opening where we can be the most effective at how we hire, train and retain our veterinarians that are in our clinics, and where we believe we'll have the fastest ramp from a results perspective. And so I think our real estate selection processes is improving. The last point is, we haven't really dug in on doing the right thing in every store from an operations standpoint. We messaged that we were starting to be in a position where we could start pulling levers and balancing hours and labor and other things to the right size of the business and letting them expand. We just started now pulling those levers and rightsizing the business so that we're not, frankly, having a bunch of people bored, waiting for people because we're overstaffed and over-houred. But those things are things that are second nature to us. Having grown up in retail our whole lives, running the stores and we wanted to get enough months behind us to feel confident we were making the right decisions that we now feel very confident that we understand the right way to invest in every way for these stores. And so in -- all-in-all, not a ton of specifics for you Brian, but I would tell you that the plan is working, it's heading the right direction and we're ready to build more locations because of what we're seeing.

That's very helpful. A follow-up question, and I apologize if I missed this, it's kind of mechanical in nature. If I'm looking the way you discussed adjusted net income, and excluding, I guess, the clinics, primarily, before you were using kind of -- clinics have been opened or open for a year, now they've shifted to what seems to be 18 months. Why that shift?

Yes, Brian. This is John. That's a great question. Thanks for bringing it up. We looked at ourselves internally and we said we've been messaging all along that the maturity model on our clinics, whether it's our new wellness centers or when we enter into new markets or new retail partners, that the maturity model is 18 months. And so therefore, when we evaluate the same-store sales add back, we should be looking at it the exact same way. So we're just having it accurately reflect and align with the way our business operates.

And this question is coming from Joe Altobello from Raymond James.

First question, I wanted to ask about the rationale for the acceleration in the wellness center buildout? You guys had touched on it a little bit this evening. But is it more that the economics are improving? Or are your retail partners coming to you more aggressively and saying, "Hey, we want your centers in our stores." And is 1,000 the right number? Obviously, you have to run -- or walk before you can run here. But is 1,000 the right number, or could we see something north of that over time?

Thanks, Joe. Good to hear your voice. Look, the 1,000 stores, when you're starting from a base number is a big number. Obviously, we have no intention of having a hard and fast stop at 1,000 if there's still real estate available and our systems are running the way to expand beyond it, there's clearly enough retail locations out there, pets and interests and we're interested in doing more. But we've set a nice, aggressive schedule how to build towards that. The rationale for expansion is confidence in our model and our people and definitely our retail partners that are pushing and talking to us about it and very receptive to how it balances everything about their pet departments, the importance of their pet parents being addressed in the store and some of the online pressures that they're feeling. So look, we're excited to have the opportunity, we're seeing enough out of it to expand. We're excited to be more analytical in how we select and put locations out there. So I think all indications are we're in the right spot.

No, that's very helpful. And if I could, two sort of housekeeping questions. First, what was the product organic product sales growth in the quarter ex-VIP? And second, your guide for EBITDA for the fourth quarter, it does imply a very wide range. Would you be more comfortable at the lower end or the upper end of the full year guide for EBITDA?

Joe, it's so funny we've been so busy on so many efforts and initiatives and other things that we haven't calculated the organic growth excluding VIP for the quarter yet, and that's a miss on me, I apologize. We'll get that number and get it to you. I will tell you that from the view I sat in, as I looked at the third quarter year-over-year, I view the third quarter, even though in the dollars wasn't the biggest quarter from the dollar standpoint and the earnings weren't the biggest dollar standpoint, but the most successful quarter we've had from an execution standpoint since we started the company. Everybody on all the key metrics delivered higher year-over-year percentages. We had less seasonal fall off. We had customers and business that was produced in the quarter that was in categories that we won't see the same seasonal impact going forward, and it translated into better margins and a ton of other better things. So we had categories that absolutely had some of the best year-over-year growth. Specifically, I don't have the exact percentage, but we're spending all of our time talking about the clinic expansion because it's exciting and it's new, but I will tell you the core base business had the best quarter we've ever had in the history of the company.

Understood. And sort of the EBITDA guide, upper end or lower end for full year?

I don't think we're going to change the guidance just yet, Joe. If you look at the guidance we originally give you in the pluses, we've guided to the lower end of it and we're on track to be above the low end of it, but there's still a lot of business to be done for us to really the guidance yet. You've seen quarter after quarter, our dollars have been coming in better from a sales perspective, our gross margin dollars have been coming in consistent with our plans as we've had the distributed items that are higher cost to deliver those numbers. And so if you do those -- that math, it says that EBITDA margin should be in the lower half. But we're excited about what we're seeing so far in fourth quarter. So I guess more to come when we talk to you next time.

Our next question is coming from Jon Andersen from William Blair.

Let's see, most of my questions have been answered, but I guess, one on the products business. There's been a pronounced shift this year towards distributed products, I think, relative to your own brands. I understand why that's the case and you've always said, you're not chasing margin rates, you're chasing profit dollars, makes complete sense. I'm just wondering, as you look out to 2019 and you think about your products business, where the bigger opportunities might lie. Is it continuing to grow the distributed side of the business at a higher rate and prescription or does it kind of maybe normalize where you see some of your own brand and OTC start to come back and so you see a little bit more of a balanced mix?

Yes. I mean, I think we've had this conversation a few times, Jon. It's pretty hard to say you're ever going to get your manufactured products to catch up at the rate that our distributed business is expanding and growing. When you're talking about a $9 billion category and the 4 largest players that are spending the kind of money that they spend on R&D and influence across the market are really leaning in and helping us fuel the growth. But there's no doubt that we can improve our dollars and our dollar margins from our manufactured product goods business. The HBH acquisition is a perfect point of the better-aligned business structure there is going to actually allow us to get significant new business with those items in our OTC consumable business and see that we are going to see a concerted effort to see that mix coming back and helping the business more. But again, I think, what you're seeing is we've done a great job bringing the veterinarian very close to the business and participating in it with the retailers. We're getting a significant amount of new customers coming through and helping drive the business. We're getting a lot of consultive help and product help from the industry in total. And I think what we're going to see is healthy, great growth. And the product business, the best news is the amount of leverage we're getting out of our G&A on in the product side is so significant that all of it is incredibly accretive and it's going to be a fantastic future for the business if it stays just like it is growing. So hope that's helpful. But it's just a good time for us right now and how things are working.

Absolutely helpful. On your owned brand business though, would you say that those brands, whether it be pet -- well, any of the OTC flea and tick or health and wellness brands, are you holding your own from a distribution market share perspective as you look at the current year and kind of expectations for next year?

Yes. As you look at us leverage the total enterprise value of what we're providing to the retailers and we lead in with that total presentation position, we're getting distribution gains in our existing customers of the items that we manufacture. It's going to fuel an expansion of that area and be another way we contribute profits to the business for sure. We've had a number of great wins that I'm sure we'll be ready to talk about after the first of the year, once they've been communicated more broadly. But you'll see increased store counts across the board on our business. So we're excited about what we're seeing. Obviously, there's a lot of things we don't know for what the competition is doing out there and we won't see until next year. But the lens we're looking through is very bright for our business and our products.

And the HBH acquisition, my understanding is you've been working with HBH collaboratively within your Springville, Utah facility. How does kind of owning them -- whether it be a tighter integration or anything else, how does that provide a benefit to what you're trying to accomplish on the product side?

Yes. I think -- well, first of all, we've be working very closely, we've been integrated, working in the same building and the business structure since 2014. So the integration is easy. The big key is the business structure, where it was 2 independent businesses, which meant you had to 2 profit centers for the company, which meant you had 2 steps before we really did any commercial transactions. We've got one P&L, one frame of mind, one team going to the market with a different threshold of margin criteria for us to compete. So we're going to be more competitive in what we do there. We know what business we could have accepted if we would have had this structure in the past and we know some of that -- and a lot of that is still available for us. So I just think it's a clean structure, one P&L, one team, and we are going to go out and be able to close business easier with that improved structure and that's how we believe strongly we will accelerate the growth out of that plant.

Excellent. One question on the service business, and I'll let you go. I think it was Chappell earlier mentioned that rollout was accelerated by 1 year. I didn't hear you say that. I just wanted to confirm whether you did say that. And then we'll leave that first. Did you make that comment, Cord? That you accelerated by 1 year?

That comment has come out of my mouth, not today, but it has come out of my mouth before. We have -- any time you say accelerate, you're going to do something faster and we do think that we're going to be able to take 1 year out of the development schedule of 1,000 stores. And having said that, if we ended up just hitting the schedule with the economics that we've proposed in the original schedule, that would still be an incredibly positive result for the company. But from a -- our ability to organize ourselves in a way to grow and expand and do more, we definitely think that, that's all possible. We think we can do it in less time with the capital we have on and getting the team working together. So more to come in the future, Jon, but it's a - definitely a goal we've put on the board as something that we believe is possible and that we're going to start stretching ourselves to get organized to do.

Okay. And is 2019 a year though where you really have to -- it seems to me like first 100 or 200 locations, you really have to make sure you get those right, you have to have the infrastructure in place. Part of Susan's -- I mean, a major part of Susan's role it sounds like is making this happen. And then once those first 100 are operating at a high level, the next 900 come quickly, right, it becomes a process, a repeatable process. Should we think about 2019 as more of a kind of an investment year in the service business? We have fewer openings maybe? Or like you said, I think, just trying to get to 80 to 120 and really trying to kind of optimize the staffing, the in-store mix and apply marketing to get the pet counts up and then the acceleration comes in future years?

I think there's...

And the reason I ask, Cord, is because I'm trying to set expectations, I'm trying to kind of understand expectations for earnings in 2019 so that people don't get too excited about the commentary around acceleration and bake that into a kind of a higher set of expectations for 2019.

Yes. So obviously we exclude the results from new stores for the first 18 months, which means no new clinics are going be included in our earnings results for 2019. These stores we just opened will start contributing the first quarter of 2020. The accelerated growth talks about the pace of stores coming online to start that clock of us maturing them to when they're added to the modeling. And so I think our goal is to take a couple of months that we're taking now as we're doing some planning and be in a position after the first of the year to give a lot more detailed view of what we see the future looking like and how we'll be organized, how we'll accelerate. We have a lot of opportunities to build locations. Some of those are very easy, where we'll convert a very successful community clinic to a health and wellness clinic. And when you've got over 3,000 stores we run community clinics in today, we have a big chunk of those that are on the cusp of being able to move into permanent clinics. So we're looking at every option on how we just take the best way to continue to expand affordable healthcare for pets and grow that part of our business in a faster way, in a smarter way. And there's no doubt that the team that's been assembled already, the team that will be added when Susan reallocates resources and deals with it and as she adds her piece to it, that we just think it gets better and brighter from here. But, yes, Jon, your -- 2019 is an investment year in the sense that yes we plan to open a bunch of stores but you don't get a really profit contribution from them because of the same store sales exclusion for 18 months. So they do need to keep that in mind. But it's going to be a fantastic 2019, and you're going to see a very bright run rate coming from where we'll be in the next couple of years.

Your next question is coming from Kevin Grundy with Jefferies.

Cord, a question back on the products business, which continues to perform pretty well and the Nielsen data looks pretty good more recently as well. Can you talk about anything that is potentially changed? Whether this is competitive missteps or otherwise? Or whether this is just success beget more success and you're just sort of continuing to do well existing retailers and pick up some more. Is there anything you'd specifically call out driving the positive momentum in the business?

Well, I mean I think, Kevin, it comes back to the very fundamental strategic moat we have around the business. We -- first built a purpose-built company that second to none gave access to all the animal health industry and then we put the gas on the fire by adding veterinarian to our infrastructure and strategy that allowed us to lean in and do more and demand more across the total industry because we're providing a very, very valuable need for everyone that participates in the equation. The pet parent, the retailer, the animal health industry and everyone else. And I think what you're seeing is, all things considered, we have such a unique business model that we've got such a great protection on that we're seeing it all contribute at a better rate. Now this third quarter is a perfect example of us not seeing nearly the seasonal impact we've seen in past years is we're seeing that acceleration across all these other categories then as you feel and see and watch that in the numbers it's just really exciting. Again, this is a business that the Nielsen data tells a story of the past that this business is a lot more about what happens to the front of the car and out of the windshield because it didn't exist before we started, so we're like you, trying to just see how far we can push the limits of success and guess where it's going to go, but right now it's going places faster than we anticipated it would have and we're getting expansion in all areas, expanded in existing customer, we're taking shelf space away from competitors, we're adding new customers, we're adding new product at those customers and we're seeing an acceleration as just the industry becomes more aware, and everyone becomes more aware that we're providing the value. So it's a -- like I said, for me, an incredibly positive quarter because we're starting to see things that typically would go against us starting to be reasons we're getting acceleration and why you're seeing the results in the quarter like we did.

Cord, and then related to the products business, very early days on the services side, but specifically with respect to products and including Rx, are you starting to see an early lift at all in those limited locations on the product side of your business from the existing -- from the existence, excuse me, of the clinics?

Kevin, we see the -- it's like we've said before, it's a chartable attachment rate of products to visits and with the 30-some-odd locations we've added this year, it's a number, but in the scope of only 30 locations and what their attachment rate is, it's nothing compared to what we're seeing across our legacy VIP business and that huge footprint and then our retail base. So we're very happy that the attachment rate we projected is happening as it should. And we are finding ways that we can improve and even do that better, but hopefully expand the rate that we're attaching, but it's happening like it should. So as we get out to 1,000 locations, there's no doubt in our mind that the product results that'll come from those 1,000 locations will be a $200 million, $300 million business for us.

Our next question is coming from David Westenberg with CL King.

So are you seeing any differences in services demanded on -- at the fixed locations, or the newest fixed locations versus what you've seen in the past at VIP and maybe mobile clinics? And maybe even was some of the fixed locations that you've seen in legacy VIP clinics?

Yes. We're staying very focused on our health and wellness and maintenance service menu today. I mean, that menu is very, very specific there. There's no doubt that we're starting to see some expanded requests. And with some of the new talent we have on board and some of Susan's guidance, we're looking at a bunch of things relative to faster diagnostics and other things that we can do to just provide a higher level of service, a faster turnaround time and a higher conversion rate. So no doubt, we're going to be adding some additional things to the menu, some things that will drive revenue for the business, hopefully, be incredibly accretive to our opportunity. But, Dave, it's still early days, so we'll see what happens.

And just maybe one last question on the -- in terms of staffing needs, clinics at a faster run rate, are -- what's the strategy for finding veterinarians, is -- how does that look? And I know that's definitely been a constraint in terms of ramping the size of clinics -- or number of clinics.

Well, I think, we've always had a great HR strategy around how we kept the number of community clinics running that we do and it's a -- almost a harder model to staff. So I think we're definitely putting a lot of effort and a lot of thought and a lot of strategy and some high-level talent that's being aggregated to help do that job. But I don't know that there's a specific strategy that we're going to say this is how we're going to do it. I think we know what we're up against and we know how to go get it done, so we're just going to go do it.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Cord for any further closing comments.

Guys, thanks everyone for joining today. Obviously, we are incredibly enthusiastic about the progress we've made in our core and base business and our ability to protect and grow that base business that's delivering the consistent results that we've delivered all year, quarter after quarter. Couldn't be more proud of the team and all the people that put the effort in to deliver and make it happen this past quarter and through the 3 quarters of this year, and we're anxious and excited to continue our fourth quarter and finish the year as strong as we've handled all the other quarters.

Thank you for all of you that listened in. Thanks to our shareholders. Thanks to our analysts that have done such a great job this year. And we'll look forward to talking everybody in the next quarter release and through some the calls over the next few days. Thanks, everybody.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for participation today.