PetIQ Inc (PETQ) 2018 Q4 法說會逐字稿

Greetings, and welcome to PetIQ Fourth Quarter and Full Year 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, for opening remarks. Please go ahead.

Thank you. Good afternoon, and thank you for joining us on PetIQ's Fourth Quarter 2018 Earnings Conference Call. On the call today 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 differ materially from actual events and those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K 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 fourth quarter 2018 supplemental presentation on their website for reference.

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

Thank you, Katie. Good afternoon, everyone. Today I will provide an overview of our financial highlights and discuss the progress we have made on our Follow the Pets long-term growth plan. John will then review our fourth quarter financial results in more detail and our outlook for 2019. Finally, Susan, John and I will be available to answer your questions.

2018 was a transformational year for PetIQ. I am very proud of our team's efforts to build a stronger and more diversified animal health organization that brings together affordable and convenient access to veterinarian pet care solutions. This resulted in significant growth of our business. We generated record fourth quarter net sales of $111 million, representing an increase of 114%, with solid growth in both our veterinarian products and service segments.

Our organic sales growth was up 70%, and we generated for this year our fourth consecutive quarter of accelerating net product sales with 83% growth in Q4. This strong finish to the year helped drive the full year net sales of $529 million, which outpaced the most recent guidance that we provided in November.

Adjusted EBITDA for the fourth quarter was $6.5 million, and $41.5 million for the full year, both results were in line with our expectations.

Our team did an excellent job to further capitalize on opportunities to grow with our Animal Health Partners, and generate incremental sales of distributed products similar to Q2 and Q3. This resulted in an anticipated shift of our product sales mix in the quarter but had no effect on our gross margin dollars. We also experienced the benefit of our scalable infrastructure with the solid leverage of our G&A expenses that helped to fuel profit growth.

Our team's strong execution of our business started early in 2018. Recall in January of 2018, we successfully completed a strategic acquisition of VIP Petcare, then swiftly integrated and optimized the business to accelerate our veterinarian wellness center growth opportunities. Importantly, this acquisition also helped us to increasingly align PetIQ with our Animal Health manufacturing partners to grow our veterinarian products business across sales channels, which is a testament to our team's consistent, customer-oriented approach and relentless focus on our mission to make pets' lives better through improved access to affordable pet health care.

During the year, we worked diligently to execute on our Follow the Pet strategy by further enhancing our core pet health and wellness capabilities. In addition to integrating VIP, we made key leadership team additions and a tuck-in acquisition of HBH, an innovative developer and manufacturer of specialty pets supplements and treats. These actions further strengthened PetIQ's overall market position in animal health and wellness. We also expanded our business with new and existing partnerships across all sales channels through complementary veterinarian product and service offerings.

In summary, we believe our strategic actions in 2018 better position PetIQ for a long-term sustainable growth. We will build upon this momentum to grow market share, and importantly, grow the animal health and wellness category for many years to come. We are in the early innings of realizing the growth we know we are capable of achieving with our veterinarian products and services business platform. Going forward, this puts us on pace to achieve our long-term growth targets for net sales greater than $1 billion with EBITDA margins greater than 15%.

John will provide our specific 2019 outlook in his remarks. But first, I will provide some additional color on our business and the sources of future growth. For the fourth quarter, our Flea & Tick business performed well and outpaced category growth. According to Nielsen-measured channel data through December 31, the Flea & Tick category was down 10.7%. PetIQ's results outpaced this result in the Nielsen-measured channels over the same period. Our brands performed better than the overall market, Nonmeasured channels were up meaningfully, and our prescription drug Flea & Tick was up significantly, and in line with the macro trends in the broader veterinarian market.

Keep in mind, for PetIQ, only 28% of our Q4 sales were in Nielsen-measured sales channels, the 72% of our sales that were in unmeasured sales channels dramatically outpaced the measured Flea & Tick sales channels, particularly in the e-commerce and Rx sales channels. We continue to generate solid increases in both SKU 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.

Our national veterinarian products and services platform addresses a $32 billion veterinarian pet products and service market opportunity as measured by Packaged Facts. And is projected to grow at a 6% plus CAGR. At PetIQ, we believe our integrated product and service model will continue to position us to outpace the projected rate of the industry growth.

From a product perspective, we continue to see significant growth from both an increasing number of consumers choosing our channel over traditional channels, and greater SKU distribution as our partners broaden their assortments in the pet category. This is a trend that, we believe, will serve as a robust tailwind for PetIQ driven by growing consumer awareness of the retail channel as a convenient and cost-effective solution for their pet wellness needs, and more doors carrying full assortments of veterinarian-recommended products.

We continue to benefit from growth in e-commerce. For the fourth quarter, e-commerce generated the highest channel growth rate for the eighth consecutive quarter, growing at a much faster rate than the overall company growth rate.

In addition, our pet Rx product roll out to an existing e-commerce partner, in Q3 generated, incremental growth in Q4. 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.

Our prescription drug program also performed well producing the highest growth rate among all our product categories. In addition to our pharmacies filling more pet prescriptions in total, our own veterinarians and clinics wrote over 1.1 million prescriptions in 2018.

Industry innovation is also helping to fuel pet Rx script growth with a significant number of pet parents opting to use chewable prescription, Flea & 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 runway for future growth across all sales channels.

In the fourth quarter, we opened 3 new wellness centers, bringing our year-end total to 34 wellness centers. In 2018, we also ran over 74,000 pop-up clinics in over 3,400 unique retail locations as our community or mobile clinics continued to provide a solid foundation and significant contribution to the company. This pet wellness platform is supported by 36 regional offices that provide all the training, HR, medical supplies and leadership for our service organization.

Today, our national footprint allows us to operate veterinarian clinics within 5 miles of 90% of the U.S. population. This is a powerful network for us to leverage as we work on executing our wellness center growth initiative to growth pet parent access to affordable and convenient veterinarian care.

Since opening our initial 20 VetIQ wellness centers during the first 6 months of 2018, we have been carefully measuring our progress and analyzing our operating model to best optimize our returns on those capital investments.

Our President, Susan Sholtis, has been at the center of this work. And as a result, we have quantified our key learnings and are now leveraging them nationally.

First, optimizing hours of operation. Upon the initial opening, we sought to better understand the optimal hours of service. For example, by location, what days of the week, and what times of day are most frequently utilized by pet parents. This was important learning from a labor-optimization perspective. We now know that we can still service the vast majority of customers but in a 5-day, 40-hour work week. This allows us to establish a presence with customers and then add hours and days as the volume requires, while minimizing expense and achieving similar contribution margins to the 30% that our prototype model suggests as we hit our mature run rate in 18 months.

Second, enhancing and optimizing a focused marketing presence. While we have the advantage of leveraging our retail partners store traffic, which is significant, we have placed greater emphasis on driving demand through marketing initiatives, which include retail partner engagement, in-store signage and geo-targeted digital marketing to pet parents around our wellness clinics.

Our efforts have netted us a 21% increase in pets, quarter to date for 2019. And those results are during the traditionally slower months for veterinarian services. Additionally, we have landed on a model that will allow us to replicate success across our current wellness clinics as well as those new clinics to come in 2019.

Third, real estate selection. Our operating team has extensive experience in real estate execution from decades spent in retail working on similar projects. So we have a deep appreciation for the power of proper site selection.

The initial locations were cast across a variety of demographic and regional makeups to allow us a diversified sample to learn from. These learnings have made it very clear to us the selection criteria required for a successful wellness clinic. For example, we know that population base and household income, while important, are not the only drivers of successful site selection. Pet population and very basic pet care spending are also important. In addition, veterinarian recruiting is much more successful in urban versus remote geographies.

Finally, we have learned that our wellness centers perform better in less real environments, and in zip codes with higher pet spending rates. We're also making the veterinarian operating the clinic a key component of our decision.

Our team is now utilizing these core tenants in our real estate discussions with our retail partners across the country to best position us for success as we begin to accelerate our veterinarian service rollout in 2019.

We currently have commitments for an additional 80-plus wellness center locations during 2019, with new wellness center openings in Q2, Q3 and Q4, we expect the majority of these openings to be weighted to the second half of the year. We are very pleased that our veterinarian service model resonates across retail partners with a little over half of our openings expected in the mass channel and the balance of the new wellness clinics' openings in both new and existing retail partners. We have made great progress internally in our integration of VIP, and today, have a development team in place that is pushing our Follow the Pets growth initiative.

We are creating alignment on site selection and other certain criteria to further build our development pipeline for the coming years. The great news is that we have a high-level engagement from both new and existing retail partners, fueling our continued excitement for future growth. As we move forward, we continue to believe that we are in the early stages of achieving our 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 ever. Driven by millennials, which are 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.

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 are unique positioned to take advantage of the macro trends that happening in the pet industry, where there is rising pet ownership and heightened sensitivity to the rising health care costs associated with pet ownership, pet humanization and increased aging of pets that all depend on better health care. The demand for our more affordable and accessible pet products and veterinarian services is strong, and we remain committed to expanding our category leadership position to fuel our future growth and value for our shareholders.

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

Thank you, Cord. We are pleased with our financial results. Our convenient and affordable offerings continue to fuel strong customer and consumer relationships, resulting in an accelerated rate of growth.

Fourth quarter 2018 consolidated net sales were $111 million, an increase of $59.1 million or 114% over the fourth quarter of 2017. Our strong sales continue to be driven primarily by growth in existing accounts with distributed products and new customers.

VIP revenue contribution in the services segment makes up the remaining balance of the reported year-over-year growth in the fourth quarter. Product segment net sales for the fourth quarter were $95.1 million, an increase of 83% year-over-year. On an organic basis, we experienced growth of 70% during the quarter.

Segment operating income was $9.6 million, an increase of 75% compared to fourth quarter last year. We continue to have excellent traction in our distributed business, and are focusing our efforts on increasing the penetration of existing accounts with additional SKUs as well as establishing new customer relationships.

Services segment net revenues for the fourth quarter were $15.9 million. As part of our VIP integration and restructuring in Q1 of 2018, we discontinued operations in certain unprofitable clinics. After taking this into consideration, services segment fourth quarter net revenues increased 8%.

Fourth quarter 2018 gross profit was $16.9 million on a GAAP basis or 15.2% as a percentage of net sales compared to $10.5 million or 20.3% as a percentage of net sales in the same period last year.

Adjusted gross profit was $19.7 million and adjusted gross margin for the quarter was 17.7%. As I mentioned, gross margin was impacted by an ongoing shift towards distributed product, but gross profit dollars were consistent with our expectations.

Fourth quarter 2018 general and administrative expenses were $18.7 million on a GAAP basis. Adjusted G&A was $16.8 million or 15.1%. I would highlight that for the full year 2018, legacy PetIQ G&A increased approximately $1.9 million year-over-year, while product revenues increased $180 million during the same period.

This is another demonstration to the degree to which we are leveraging our fixed overhead and increasing our utilization rates, a trend we think should continue for many years to come.

We will continue to strategically make disciplined investments in our business to support our future product and services growth. Importantly, our legacy service platform has reached an inflection point as it relates to G&A. And as that business builds from here, we'd expect similar leverage to those fixed costs as well, making for improved operating profits into the future.

Fourth quarter 2018 adjusted EBITDA was $6.5 million and adjusted EBITDA margin was 5.8%. Full year 2018 adjusted EBITDA was $41.5 million, reflecting a margin of 7.9%.

Turning now to the balance sheet before we touch on debt and liquidity. Here are a couple of quick comments on working capital. We saw a decrease in accounts receivable of $8.6 million compared to prior year quarter. This is in line with our seasonal sales mix largely driven by Flea & Tick products. Inventory increased $16 million to $92 million. This increase is the result of inventory needed to support the growth in our business, and December inventory purchases tied to a shift in timing from customer shipments to the first quarter of 2019 from the second quarter of 2018. We are maintaining inventory levels in line with our sales needs. Our liquidity continues to be in great position to address our future growth. As a reminder, during the fourth quarter, the company completed an underwritten offering of 2 million shares of primary Class A common stock for a total net proceeds of approximately $73.9 million.

The company had cash and cash equivalents of approximately $66 million as of December 31, 2018. In addition to our revolving $75 million credit facility, we had $62 million available at the year-end. Our total liquidity was approximately $128 million. Total liquidity at December 31, 2018, increased 165% from $48.4 million for the prior year. The balance sheet has never been stronger.

Now onto our 2019 outlook. We experienced exceptional organic growth in 2018 of 45%. We continue to have great confidence in the business and are reiterating our long-term 2023 growth objectives for net sales of $1 billion and adjusted EBITDA margin of greater than 15%.

As we look to 2019, we are providing net sales guidance that takes into consideration the significant growth that we achieved in 2018. We are forecasting consolidated net sales to exceed $600 million, an increase of at least 14% versus full year 2018 results, which increased 98%. We are forecasting adjusted EBITDA to exceed $51 million, an increase of at least 23% versus full year 2018 results, which increased 86%.

While we've experienced a significant mix shift toward branded distributed product due to our alignment with our animal health manufacturing partners, we do expect this dynamic to moderate in 2019. And are forecasting unadjusted gross margin percent to be approximately flat versus 2018.

From a G&A perspective, we expect to continue to generate leverage. As Cord mentioned, we expect to open more than 80 new wellness centers in 2019, beginning in Q2 with the vast majority of wellness centers opening weighted towards the second half of 2019. In closing, we are very pleased with our full year and fourth quarter results, and remain excited about our future growth prospects.

With that overview, Susan, Cord and I are available for your questions. Operator?

(Operator Instructions) Our first question comes from the line of Jon Andersen with William Blair.

Wanted to ask about the 2019 guidance to begin with. Could you talk a little bit more about your expectations around the cadence of the year, 14% plus growth of a top line and leverage on the bottom line is a -- on a full year basis, obviously, is another strong outlook. But I just want to make sure I understand any kind of puts and takes as you move through the year, particularly, with the -- some of the timing of the Flea & Tick season in '18. And then the timing of the new clinic openings in 2019.

Thanks for the question, John. Obviously, we had extremely strong 2018 year with a record growth. And that growth came from a lot of different areas. But part of it was our ability to consolidate a ton of the business, which caused us to have a significantly higher growth rate than what we've messaged for 2016 -- or 2019. However, we're extremely excited because the momentum we see in Q4, and the fact that our business is so diversified and it isn't just about Flea & Tick anymore, we can get a sense and feel for how we're going to go into the new year and how we're going perform. And I've already seen very exciting results already flowing through the business, some year-to-date in our performance thus far. We have messaged that our sales will be approximately $600 million or greater, which takes into account our belief that we have lots of things continuing to flow and grow with the business this next year, which is very exciting for the company to see the top line continue to have that type of growth. We also know that the business, as we saw this last year, that had guidance of $450 million to $500 million, and we continued to update it as we saw acceleration. And we believe that, that still exists in the business. But we'll have to hope and see how it flows through and see how the year comes out. But we do know that those same things that caused us to be so far above the top end of the sales this year are obviously still in place, and we could see acceleration that flows through the business from that. From the G&A perspective, as you get time to study what we've put out there, and you get time to study the EBITDA contribution, we're estimating EBITDA to increase 60 basis points to 8.5% from the 7.9% we finished in 2018. And that's a direct reflection of the continued leverage we're seeing in the business. And it really comes from 2 parts. We can absolutely see significant leverage coming through the product business, as that business has gotten to the size that it is. And John's communication, but just -- the pure, crazy amount of increase we saw on the top line with such little increases in our G&A to support it. But we really are in an inflection point in our services business as well so where every dollar of revenue, we'll start to see that flow through. So even though we've made investments in G&A this year, and we brought on HBH with their G&A, we still see operating leverage that we believe is the expanded EBITDA margin, which is a direct reflection of that G&A leverage even though our margins are relatively stable for 2019. That help you with your question, John? Is there another part you want me to cover?

No. Well, a couple -- yes, a couple of follow-ups on that. On the product side of the business. You're coming off a terrific organic growth year. Could you talk a little bit about what your expectations are for organic growth in the product side of the business in 2019? And where you see the significant opportunities? Is it a full year benefit of the Rx program with this new e-commerce customer? Are you winning new distribution with existing customers, your new customers? Just maybe some color around where you see the opportunity on the product side and the magnitude of the growth there throughout the course of the year.

Yes. So I think, obviously, we do get to have the first half of the year with that new opportunity, now having 2 more quarters that we're not anniversarying that from the first year, which will be a nice contribution to the year. However, we've always talked about the fact that the industry in total is growing at a CAGR that is in that kind of 6% to 7% type range. And we've always done better than that in total. So the product business, we believe, on an organic basis will be a greater growth rate than the service business this year. When you exclude new clinic openings, we'll be a low double-digit growth rate on our community mobile clinic business this year, which when we message, it will be up in that kind of 14% range in total. You can see that the product business is going to have an organic growth rate better than that for the year. So we're excited about that. We don't have a lot of new store or door distribution wins this year. We're, obviously, have such a significant customer base out there that what you see flow through is very organic in nature to the business. And then we're excited to see it flowing through already in this first quarter.

Great. Just one more for me on the service business. Thanks for the color around some of the learnings. You talked about hours of operations, some of the marketing efforts, real estate strategy. Can you talk a little bit more about what you're seeing in those initial 20-some-odd locations? Are you seeing the pet counts ramp in line with expectations? Do you still think that, a, unit economic scene at around $600,000 of revenue per clinic is the right way to think about this after 18 months of maturity? And then is there anything else that you think you need to do here maybe it's early on in the rollout to just ensure that you're building kind of awareness levels and the traffic in those locations? Yes, I'll leave it at that.

Okay. I'll take the first part of that and I'll let Susan take the last part around the awareness and what we're doing to build it. Obviously, when we started on our mission to expand our wellness program significantly, we had a bunch of things we wanted to learn from it. I think the first thing you need to know is that we already had a number of wellness centers operating in the business that were delivering the results after 18 months that we communicated where we were up in that $600,000-plus type number is delivering those 30% or 35% contribution margins and 25% EBITDA margins. We had no history operating in a significant mass retailer with those size of stores or those type of customer counts. And the initial site selection really intended to let us find out if just a store of that size, with that may need people, a wellness center could work anywhere and that it could support really any size of operation with that type of customer base. And obviously, what we've messaged, we've learned that, first and foremost, you still need to be disciplined about your site selection process to make sure that there are not just people there but there's people there that want to take care of their pets, that spend money on their pets, that -- there's veterinarians that we can count on to be stable and build that relationship that continues to build loyalty in the store. And just a number of learnings around just a number of hours of operation, our stores that are doing up in the $600,000-plus range and delivering those results, they're only open 40 hours a week or less, and typically have one veterinarian, a few technicians. Our initial stores we opened up for 60, 70 hours a week and had 2 veterinarians, a lot more labor and cost, and what we're learning is you can be more conservative with the operation and grow into the size of operation that necessitates more labor to support the business. So what we've clearly learned is, number one, we need to select stores that meet the right criteria, we need to be more diligent about doing what we know is right and how we select stores, there's plenty of opportunities out there. Our numbers are not at risk to achieve our long-term stated objectives by choosing stores that meet the criteria. And second, we need to be sure that we're optimizing our P&Ls and running our business in a way that is just smart, so taking care of how we're going to operate and run the business. Of the first 20 locations, when we go back and apply the metrics of what and how we choose sites, it's no surprise that the locations that meet our criteria are performing and growing. And the sites that don't meet our criteria, although they are growing, they're not growing at the pace we like them to grow and it's going to take longer. So we're definitely excited to see that we don't think we're wrong, that there's plenty of opportunity for expansion. And ultimately, when we run a more conservative P&L, we can get to 20% plus EBITDA contribution margins at volumes that can go all the way down to $400,000 a year in sales. But still are very optimistic that the right size of these can be well up into that $600,000 of -- range and the kind of contributions that we've talked about. Now I'll let Susan address your marketing and anything else like you'd like to add.

Yes, good afternoon. I'll just add a couple of comments completely -- Cord emphasized, obviously, the importance of geographic and demographic information, and that's choosing the wellness centers. But it's also not just those, it's also making sure that we've got a understanding of our marketing levers as well too. We do have an agency of record that we've hired. That agency has extensive experience, not only within the retail environment but they also have experience in animal health over 25 years' worth. So they understand the category very well. They've jumped right in. And we are in a strong partnership with them, and with our marketing team, we have focused and we have geo targeted a campaign around our 34 wellness centers because our objective is to understand what levers we need to pull in order to be able to drive that pet traffic. We are singularly focused on that individual piece. I think I would say also that it's early, when you go back to last year, some of these centers basically opened later in the year, so when you look at fourth quarter and first quarter of this year, those tend to be the slowest times for veterinary services. And literally we're going out the door now with our marketing campaigns starting in February. So we still have a lot to learn from those marketing campaigns and understanding how we can drive traffic even in some of those more rural areas.

We're very optimistic. Because we've seen those campaigns launch, and already seeing our overall headcount's up already 21% just in the month of February by using our first program. So yes, we're still very excited, and obviously, very excited about the next round of locations we'll be building, Jon.

Our next question comes from the line of Brian Nagel with Oppenheimer & Co.

My first question. I guess, mostly on the guidance. So you laid out guidance next year for -- this over 14% sales growth. So the question I have there is, first off, is that -- is the 14%, is that consistent with the longer-term targets? Or is there -- should we think about there being some factors that are unique to 2019 to keep them off that linear trajectory to the longer-term sales guidance? And then second question to that, maybe a follow-up a bit to the one previously, but as we think about what's going to contribute most to that sales growth. Can you give us any better parameters between, say, the distribute business and the service businesses within that growth rate?

Yes, I think we can. Thanks for the question, Brian. Our long-term stated growth rate is to maintain a 15% top line growth rate. We've always had greater than a 15% growth rate, but we've never given guidance on growth that we didn't have 100% visibility of what was in the plan and how the business was executing. And we've definitely given you guidance in line with that visibility. However, our visibility to last year had us finishing between $450 million and $500 million, had plenty of things to accelerate that were not visible at that point. And this is a space where there's $10 billion of product, and $20 billion of services. And I think we're extremely well positioned to receive anything that comes through this space and in a way that gives us room to do better than that, just like we did this year. But there is no doubt that there is a base that's [guiding] much larger. And definitely, the visibility we have that we've applied to it, lets us feel great about being able to go from the $528 million we did this past year to something better than $600 million, and I think in line with where we felt we have visibility too, but plenty of room for us to do better than that as we go out and execute on our plans. The best part about our business was 7 different things that contribute revenue, and all of them growing. We do get growth from everything at this point, Brian. Our service business, even down to our mobile community clinics. Everything is growing in a positive direction for the company. And there are things like our prescription drug program, which is predominantly distributed. But it is outpacing things, we've messaged, it's been our most exciting category from an overall growth perspective. But I think we're well positioned to grow in all categories very significantly as a business. And feel great about our customer relationships, feel great about our partnerships in every aspect of our business and fully anticipate that we're going to have another great year growing our business as we continue to focus on giving people access to affordable pet care for their pets.

That's helpful. Then a follow-up, if I could. With regard to the service businesses. So you're planning -- you indicated that you're planning to open 80 centers next year, which was at the lower end of the original guidance for 80 to 120. But you laid a number of tweaks and changes you're making. Is that moving to the lower end simply a function of now looking maybe more specifically for locations or some other factor at play?

I think it's a couple of things. That's definitely part of it. I think the reality of it is, is by the time we announced it we were going to expand and get to work and get our team organized, and then the pace at which our retail partners could work with us, we've been working diligently. We're ready to do more than that. We feel great that the things that are important to us from a criteria standpoint puts us on pace to be at that 80-plus number. Out of those 80-plus numbers, 75% of them are contracted at this point. The other 25% were in review stage with it, but are so close that we feel confident telling the market, we're going to be better than 80 locations this year. So it's -- but definitely applying the metrics, applying the disciplines on how we're selecting sites. But the number one factor is just getting all of our retail partners to keep up with us at the pace that we're ready to work at. And I think we feel great about our plans for the locations we're going to build, where we're going to build them, we're going to see some store clustering that we haven't had in the past, that give us the opportunity to be even more focused in how we're going to go to market. And I think, we're going to have another great round of locations with a significant amount of learnings still as we push forward this mission of being able to build 1,000 clinics over the next 5 years.

Our next question comes from the line of Joe Altobello with Raymond James.

So first question on the wellness centers. You mentioned a few of the wellness centers you opened this year, not performing up to plan, which is obviously to be expected to some degree. And it sounds like site selection is probably a big driver of that. So how much input do you expect to have going forward with your retailer partners in terms of site selection? Is that going to be dictated to you guys? Or do you want to have more of a say on where those wellness centers get opened?

I'd be happy to jump in and answer that question. It actually is a much more robust process. So we literally are sitting down with our retail partners, taking a look at their locations and overlaying all of our metrics on top of that. So it is a very iterative process, but it's done in conjunction with both ourselves and our retail partners. Really making sure that we also are overlaying that data, because without overlaying that data, we have much less certainty than what we can have when we understand those particular pet metrics that we use.

I think, Joe, to be specific, we don't have a retailer that's dictating locations. Every retailer has been very positive to receive the information and the learnings. They don't want locations built where they're not going to be able to perform and provide the value to the consumer. And so there won't be a site that they don't want and there won't be a site that we build that we didn't make the decision to build it there.

Okay, understood. And then secondly, in terms of mix shift. You've talked about this, this quarter and in the past few quarters, what's the biggest driver of that between the distributed versus manufactured product? Is it coming from the retailer? Or is it coming from your manufacturer partners?

I think it's a lot of things. But ultimately, 2018 was the first year that all of the major manufacturers actually participated in the process for selling into this space. And if you think about a category that has $10 billion of products in the veterinarian market, and really everybody pushing at the same time to drive business, we had no idea what that was going to mean to the business. And so we saw a significant amount of acceleration and script counts that were filled through our pharmacies as that accelerated. We saw better marketing plans on Bayer brands in both prescription, over-the-counter, and that mix is something that we welcomed as our sales went out the top end of the range. And we saw that happen. We're able now to participate in their R&D, and their new item launches in a way that we never have before. And so I think the reality of it is, at the $10 billion product category and you know we're a $450 million player in that $10 billion and we believe with that kind of a share, we can have tons of room to grow the total business. And although, we would love to continue to have a good mix of what grows out there, we view that all business that is helping consumers get to better pet health care for their pets through the better products they're buying is good business for us, Joe. And the leverage we're seeing on the product side, we shouldn't be afraid of any growth in any part of the business that we have on that part of the business.

And why do you think that shifts back a little bit this year?

Say what?

Why do you think that shifts back a little bit toward manufactured this year?

I think there's a few things. Obviously, when we acquired HBH and integrated it, I mean, it gave us a platform that we think we can accelerate growth with items there as we get into a cleaner structure for how we're taking the products out of that plant to market. I think secondly, we've emphasized that, that part of our business needs more attention and we had really that first year of all the manufacturers and when you have that much attention given to one thing, we lost some balance to that focus. So I think we just made sure we went through a planning process that we're not going to lose attention to anything, but we're definitely letting people know where we didn't have as much emphasis or supervision to getting some of the business done that we should've gotten done in the past. And then we obviously cleaned up the structure a little bit on some of it. So I think you'll see that -- we'll see some acceleration there.

(Operator Instructions) Our next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey.

This is actually Grant on for Bill. Just a follow-up on the manufactured growth this year. Is there any reason or plan to maybe accelerate some marketing programs or some more investment in that part of the business going forward?

Look, I think we had the right plans, I think, in place all along. I think we have -- as I said earlier, just made sure as we build our plans, we go to the market, we do it at the item level and at the customer level. And we had our hands full as we took the business from $267 million to $530 million. We, obviously, see another $75 million, $100 million of opportunity growth this year. A little more digestible to all that we took on last year. We also took on growing from 200-plus employees to over 3,000 in a single year as well. So I think we're in a good place where we've been able to make sure every aspect of our business has been planned, both at the item and at the customer level with the right amount of marketing balance tied to the actual results that will come through the business. So I think in general, we had a transformative year. We had 2 acquisitions. We more than doubled the business. We had literally a 1,000% increase in our employee base for the year. And we're in a place where we've done that well, we've integrated and we stabilized, we have an opportunity to get everybody in a place where they know what to go work on. And we're excited about what we think that will translate into that part of the business.

Got it. And then just a follow-up on the wellness centers. How many total retail partners do you have locked in at this point to have those clinics in their stores?

We have currently 6 partners. And I think as Cord said a little bit earlier, 75% of those are contracted at this point in time with the remaining 25% currently in review.

Our next question comes from the line of Kevin Grundy with Jefferies.

Cord and Susan, question for both of you on the services side. Products -- I guess, typical for recent quarters has been products very strong, and maybe as you're sort of rolling out on the services side, that's been a little bit light at least relative to sell side models. Can you talk about the flat same-store sales growth number on the services side? How that came in relative to your own expectations in the quarter? And then maybe sort of help us how we should think about that growth rate -- that same-store comp for 2019? And then I have a follow-up.

Kevin, I think part of the -- tough part of the year you acquire a business and you bring in that business. We, right out of the gate, messaged that we had some restructuring that had us optimize schedules, which included us reducing frequency but keeping a store in there. We had other stores we eliminated completely that we no longer service because they were unprofitable. And I think as you think through the restructuring, it became very difficult to get to a clean data point on how you'd look at same-store sales from a true kind of comp basis. So when we look at kind of all those things normalized out, we ran store comps, I think, around 8% year-over-year in our service segment. And we view that it was a absolutely very successful year for us in many ways in a sense that we integrated the people, we got a good base and culture in place for how we budget and measure success. We brought those metrics out to the 34 regional offices that we have across the country, which has led to better decision-making, which flowed through in better profitability for the company. And as we said before, it is such a tipping point in the business because now that we've stabilized that, the incremental growth has, for the first time ever, significant leverage into the business from there. So our community clinics that had basically been very flat on their growth, we're seeing low double-digit growth in those locations year-over-year. A lot of it driven by just increased pet counts. And then when you think about the fact that we ran 74,000 clinics last year. If we see one more pet, that's 74,000 more pets that we'll see. And when your average ticket is just under $100, it's a significant amount of new revenue at very, very high margins and no incremental cost to support them. So it's a much better story than it sounds on the surface. And I think we are in the place where as you think about the wellness centers expanding and maturing and getting to where we have those contributions, it's just a hockey stick in the future. So we're actually very excited about the way the year finished and extremely excited as we're seeing the expanded contribution coming to our budget for 2019.

Okay. And then 2 points of clarification. One, on the 30% contribution margin from the mature clinics, is that still a number that you're comfortable with? And then also co-related to 2019, you had spoke in the past about sort of some optimism around a mid-teens kind of growth rate on the product side. So as we're thinking about the composition between products and services, is a mid-teens kind of growth rate on an underlying basis, still something you're comfortable with on the product side. So thanks for that.

Yes, I mean, the answer is yes, and yes, Kevin. We feel very good about that business growing and again, we're feeling very good about kind of that low double digits on the service side. I think if you apply that math, it falls in line with us getting to that approximately $600 million or better.

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

We're obviously very excited here at PetIQ for all the success we had in 2018. It was a transformative year for the company. And although, there is a lot of excitement about talking about what the future holds and is bringing and the exciting new things that we're doing here at PetIQ, we are still extremely excited about our base that company that did $528 million in sales, and have been one of the most record years we could ever hope for as a company. And we saw that build throughout every quarter we had through the year. So we are excited to continue to see that momentum as we know pet owners are desperately looking for ways to find pet health care in locations that are more convenient and more cost-effective. And we feel strong that PetIQ has hit the bull's eye of providing people access to that. And as we continue to execute and do that, we feel very strongly that we will do nothing but continue to grow, drive leverage into the business, which will increase profitability, and really help everybody that's in the value chain, whether it's our retail partners, our customers that are doing business with us, those pet that are getting health care and ultimately our shareholders, they get to participate as we continue to successfully grow the business. So we thank all of our employees, all of our partners, all of our customers and everyone else out there that helped us have such a successful 2018. And we look forward to having an equally successful 2019, and look forward to being back, talking with all of you as we finish Q1 and report our results from that quarter. Thanks again, everybody, and everybody, have a great evening. Thank you.

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