PetIQ Inc (PETQ) 2019 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the PetIQ First Quarter 2019 Earnings Conference Call. (Operator Instructions)

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

Thank you. Good afternoon (technical difficulty) PetIQ First Quarter 2019 Earnings Conference Call. On today's call are McCord Christensen, Chairman and Chief Executive Officer; and John Newland, Chief Financial Officer. Susan Sholtis, President, will also be available for Q&A.

Before I 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 can 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 First Quarter 2019 supplemental presentation on their website for reference.

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

Thank you, Katie. Good afternoon, everyone. Today I'll provide a brief overview of our financial highlights, provide some insights into the growing services segment, and discuss how the acquisition of Perrigo's Animal Health business fits into our Follow the Pets long-term growth plan.

John will then review our first quarter financial results in more detail and our reiterated outlook for 2019. Finally, Susan, John and I will be available to answer your questions.

2019 has started off strong. We generated record consolidated net sales of $148 million, an increase of 29% and adjusted EBITDA of $10.9 million, an increase of 94% over Q1 last year. Our results were fueled by broad-based growth across all sales channels with solid sales and profit contribution from both our veterinarian product and services segments during the quarter. The demand for PetIQ's affordable and accessible pet products and veterinarian services is increasingly strong and we remain committed to expanding our position in animal health and wellness to fuel our future growth.

Focusing on our business segments in a little more detail, our product business demonstrated continued strength driven by our prescription drug programs within retail partner pharmacies and increased velocity of all our pet health and wellness SKUs within existing accounts. The consistent results within our product segment reflect our direct engagement with the animal health manufacturing community and with their support we are executing thoughtful sales channel strategies to meet the unique needs of all our partners, both in-store and online.

For the first quarter, our flea and tick business performed well and outpaced category growth. According to Nielsen measured channel data through March 31, the flea and tick category was down 4.3% and has rebounded to approximately 2% positive year-to-date through mid-April. PetIQ's result outpaced this result in the Nielsen measured channels over the same period. Our brands performed better than the overall market. Non-measured 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 27% of our Q1 sales were in Nielsen-measured sales channels. The other 73% of our sales that were in unmeasured sales channels dramatically outpaced the measured flea and tick sales channels, particularly in the e-commerce and Rx sales channel. We continue to generate solid increases in both SKU velocity and distribution.

We continue to benefit from growth in e-commerce. For the first quarter, e-commerce generated the highest channel growth rate for the ninth consecutive quarter, growing at a much faster rate than the overall company growth rate. In addition, our Pet Rx product rollout to an existing e-commerce partner in Q3 generated incremental growth in Q1. We remain very pleased with the strong result of this Pet Rx rollout and believe this further reinforces our optimism for this category over time as more of our partners look to expand online with animal health and wellness using PetIQ as the preferred vendor of choice.

Our prescription drug program also performed well producing the highest growth rate among all of our product categories. In addition to our pharmacies filling more pet prescriptions in total, 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. We are also very pleased with our team's efforts to making progress on the rollout and development of our services segment operating model, as demonstrated by our robust services segment, net revenues and solid operating income for the first quarter.

We achieved greater customer engagement and higher pet counts per clinic. This trajectory of which we expect to continue to drive future growth in our veterinarian services business throughout 2019. Our President, Susan Sholtis, has been immersed in this business since joining the executive team last October. The results of her leadership has become more apparent each quarter. Our team is taking our key learnings since acquiring VIP last January to accelerate our community clinic services business model while making incremental refinements to our emerging wellness center operating model to position our services segment for long-term profitable growth as we accelerate unit openings in the coming quarters and years and optimize our returns on those capital investments.

We are very encouraged by the results we have achieved from the 3 wellness centers we opened late in 2018. The 3 clinics are located across 3 different states, but with similar demographics plus we implemented a similar marketing approach to drive demand. All 3 are experiencing a rapid lift in pet counts and are already producing positive EBITDA contributions in March. We think this is a strong validation of our services model and demonstrates the benefits of many of the refinements our team has made to help ensure our success as we scale.

We remain confident in the viability of the unit level economics of our prototype and believe that we can achieve contribution margins in excess of 30% that our prototype model originally highlighted. On average we hit our mature run rate for our wellness clinics in 18 months.

In preparation for our veterinary wellness center expansion we opened 2 new regional offices during the quarter for a total of 36 at the end of the first quarter of 2019. We continue to work with our retail partners to fill our development pipeline with optimal locations and remain on track to open 80 new wellness centers in 2019 which are spread across 6 different retail banners in more than 20 states. We plan to open 7 VetIQ Wellness Centers in Q2 and believe that we are the only veterinarian service provider in the country with the infrastructure to support a national rollout like this in an organized fashion.

In summary, our first quarter results demonstrate the strength of our well-diversified animal health and wellness products and services business. We believe our operational and financial achievements for the quarter reflect the strength of PetIQ's mission to make pets' lives better through improved access to affordable pet healthcare. We are targeting a large, underserved segment of the pet population and consumer demand continues to grow for the value and convenience PetIQ brings to pet parents.

To further our long-term objectives, we are excited to announce that we signed a definitive agreement to acquire Perrigo Animal Health for $185 million in cash. So why Perrigo Animal Health? And why now? For starters, affordable and convenient pet care continues to grow across the United States and this provides us with greater manufacturing scale and complementary, high-margin brands and people that can help continue to accelerate PetIQ's long-term growth plan.

For those of you new to Perrigo Animal Health business, they are a leading diversified manufacturer and marketer of over-the-counter pet health and wellness products sold under brands including PetArmor, Sentry and Sergeant's in the United States. With distribution across pet, grocery, mass, e-commerce, drug, club, and specialty retail sales channels, Perrigo Animal Health has sales across the flea and tick, dewormer, behavioral, dental, and other health and wellness product categories and is supported by the state-of-the-art manufacturing facility located in Omaha, Nebraska. We are excited for the opportunity to welcome Perrigo Animal Health's team to PetIQ. We plan to capitalize on our opportunities to increase our manufacturing scale, expand product and brand diversity, and improve our customer reach all while we capture significant cost savings and synergies to fuel greater net sales and profitability.

I would like to highlight a few of the key strategic and financial benefits we expect as a result of this transaction. First, we believe that our existing portfolio of products with the complementary Perrigo Animal Health business will create a combined company with approximately $605 million in pro forma 2018 net sales. Their branded product business has a stronger margin profile than PetIQ's existing business, enabling the potential for significant margin expansion for the combined company.

PetIQ will now have even more meaningful product category, brand and sales channel diversity with a focus on accessible and affordable, high-quality preventative and wellness veterinarian products.

Second, this acquisition allows us to more rapidly realize the opportunity provided by the macro trends in the pet industry. Where there is rising pet ownership, a heightened sensitivity to the rising healthcare costs associated with pet ownership, pet humanization and increased aging of pets that depend on better healthcare, we believe that our complementary distribution channels and sales teams provide actionable white space opportunities in new and existing customers representing the potential to accelerate net sales growth for both PetIQ's and Perrigo Animal Health's current product portfolios.

Third, in addition to benefiting from greater operating scale and increased procurement savings, Perrigo Animal Health will add outstanding manufacturing expertise and marketing capabilities. We expect these to provide meaningful future cost benefits to PetIQ. Together, the combined company expects to generate more than $3 million in run rate cost synergies by 2020 and growing to more than $5 million by 2021, primarily from procurements, manufacturing and marketing efficiencies. Beyond these cost benefits we expect to realize additional benefits of scale via sharing of best practices, leveraging established infrastructure, and strengthening our retail partnerships.

And finally, we believe the acquisition of Perrigo Animal Health will create significant long-term value for our stakeholders as we further the execution of our Follow The Pets long-term strategy by combining our companies' complementary-branded pet health and wellness product offerings to create a larger and more diversified business. This business combination is aligned with our mission to make pets' lives better through improved access to affordable pet healthcare.

We believe this transaction creates a much stronger and more diversified animal health and wellness platform with the opportunity for us to achieve accelerated growth and enhanced profitability now and into the future. We are pleased with PetIQ's continued strong momentum and are very excited about Perrigo Animal Health. We believe we are well-positioned to deliver another quarter and year where we generate incremental distribution and velocity gains across our brands in both new and existing sales channels. We remain committed to executing against our growth strategy and look forward to continued sales and profit growth.

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

Thank you, Cord. Before I get into some of the specifics around the Perrigo Animal Health transaction and its effects on our consolidated financials, I'll first speak to our quarterly financial performance, which we were very excited about.

First quarter 2019 consolidated net sales were $148.4 million, an increase of $33.4 million or 29% over the first quarter of 2018. Our strong sales continue to be driven primarily by product segment growth, particularly within existing accounts. And as Cord mentioned, we are pleased with the strong results from the base service business in the first quarter.

Product segment net sales for the first quarter were $126.1 million, an increase of 29% year-over-year. Segment operating income was $13 million, an increase of 45% compared to first quarter last year. We continue to have excellent traction on 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.

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 are benefiting from a growing industry adoption of pet medication in e-commerce. Our Pet Rx product rollout to an existing e-commerce partner in the third quarter of 2018 continues to be a source of growth for our business and we expect this momentum to continue through the second quarter before we anniversary the initiative later this year. We have been very pleased with the results of this rollout and it further reinforces our optimism for this category over time.

Our traditional prescription drug program, which supports retailer brick-and-mortar pharmacies, also performed well and we expect this to be an ongoing source of growth as consumer awareness grows and the animal health manufacturers further innovate within key categories. These industry tailwinds are driving more pet prescriptions towards retail, which our customers are filling. I'd also highlight that our own veterinarians and clinics wrote over 1.1 million prescriptions in 2018. This demonstrates the direct impact of our national service network.

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.

Service segment net revenues increased 30% on a GAAP basis for the first quarter to $22.4 million. Excluding the contributions from our wellness center initiative, first quarter 2019 adjusted service net revenue grew 23% versus the prior year to $20.8 million. Service operating income was $3 million, an increase of $3.4 million compared to the first quarter last year where we recognized an operating loss of $400,000.

As Cord discussed in his remarks, the service organization has done a great job to enhance the offering and further refine our community clinic model. These initiatives are driving a (inaudible) in total pet counts across our platform which will be instrumental in our ability to drive long-term segment sales growth as well as leverage the significant fixed infrastructure that is already in place.

First quarter 2019 gross profit was $24.7 million on a GAAP basis, or 16.7% as a percentage of net sales. This compares to $15.9 million or 13.8% as a percentage of net sales in the same period last year. Adjusted gross profit was $26.2 million and adjusted gross margin for the quarter was 17.6%.

Consolidated gross margin was positively influenced by the growth of our service segment and further supported by some normalization of our product segment mix between distributed and manufactured items which is consistent with our expectations.

From a segment level perspective we realized strong year-over-year margin performance in both products and services, even when normalizing the prior year for the partial impact of the VIP acquisition.

Before turning to G&A I want to address the concept of vendor rebates and provide you some comfort around the contracted rebate structure that the animal health manufacturing community utilizes with our customers and distributors. PetIQ obtains certain contracted vendor rebates for products based on a consistent percentage of dollars purchased. These contracted rebates are incorporated directly into our known cost of goods. These rebates are collected periodically in accordance with industry norms and are not a significant item for disclosure within our GAAP financial statements. Additionally, our audit partner has confirmed our flawless accounting for these rebates and remains supportive of our practices.

First quarter 2019 general and administrative expenses were $20.5 million on a GAAP basis. Adjusted G&A was $18.1 million or 12.2% of sales. This is down approximately 50 basis points compared to 12.8% in the prior year period. As we have previously stated, the scale-related efficiencies that we are generating within our product segment will be similarly apparent as we grow our service platform. While we continue to strategically make disciplined investments in our business to support our future product and services growth, we believe the service business is at a tipping point of becoming considerably more profitable after decades of investment by the VIP team and we are excited to communicate further gains in the future as we execute on our growth initiatives.

First quarter 2019 adjusted EBITDA increased 94% to $10.9 million and adjusted EBITDA margin was 7.3%, which is an increase from 4.9% margin in the prior year period.

Turning now to the balance sheet, the company had cash and cash equivalents of approximately $54 million as of March 31, 2019. In addition to our revolving $75 million credit facility, we had $53 million available at quarter-end. Our total liquidity was approximately $107 million.

Since first-quarter end we've engaged in agreements for additional financing to support the planned $185 million acquisition of Perrigo Animal Health. PetIQ plans to finance the transaction with $25 million of existing cash on hand and $145 million of new term loans financing secured from Ares Capital Management. The remaining balance will be financed through existing revolving credit facility with East West Bank. Pro forma for the transaction, net leverage is expected to be approximately 4.5 times. Due to the strong demonstrated cash generative nature of the Perrigo Animal Health business we believe that we should be able to reduce the leverage by 0.5 turns on an annualized basis.

In other words, we feel confident that we have the balanced capital structure in place that can support our rapidly-growing products and service business to achieve our stated long-term growth objectives. The transaction is expected to close during the third quarter of 2019 subject to customary closing conditions including U.S. antitrust approval.

Now on to our outlook. We experienced exceptional organic growth in 2018 of 45% as we consolidated our competitive position in the industry and helped our retail partners build out their presence in this high growth channel.

2019 has gotten off to a great start, and we continue to have unwavering confidence in our business. As such we are reiterating our standalone 2019 guidance for consolidated net sales to exceed $600 million, which represents an increase of at least 14% and compares to full year 2018 results which grew by 98%.

We are forecasting adjusted EBITDA to exceed $51 million, an increase of 23% versus full year 2018 results which increased 86%. We continue to believe that we've reached a new equilibrium within our distributed versus manufactured mix, which is supportive to reported gross margin in 2019, and as a result, we are targeting gross margin to be approximately flat versus 2018.

As Cord mentioned, we remain confident about our ability to open more than 80 new wellness centers in 2019 and are already underway with 7 planned openings that we have in the second quarter pipeline. This does imply that the vast majority of our wellness center openings are weighted towards the second half of 2019.

For full year 2020 based off a combination of PetIQ and Perrigo Animal Health we're introducing our expectations for consolidated net sales of $780 million and adjusted EBITDA of $78 million.

We are also reiterating our long-term 2023 growth objectives and expect to update these following the close of the Perrigo Animal Health acquisition. These objectives call for net sales of approximately $1 billion, adjusted EBITDA margin of greater than 15% and 1,000 wellness center locations.

In closing, we are very pleased with our rapid start to 2019 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 is from Kevin Grundy with Jefferies.

Let's start, Cord, if you wouldn't mind, on the Perrigo transaction. Maybe a little bit on how the transaction came about. Growth rate for the business over the past year or so, expectations going forward. And then maybe a little bit on -- a little more, Cord, on the synergies of the deal? Why the 1 plus 1 equals 3. Cost synergies, look fairly compelling. But then what these -- what bringing this portfolio into the fold here does for the combined businesses. I think that would be helpful?

Well, thanks for the question, Kevin. The transaction came about, we were contacted months ago by a banking group, by Blair, that was representing the seller. They viewed PetIQ as the most strategic and likely best owner of the assets, and we engaged our banking team, attorneys and auditors, KPMG, Winston and others, to start the process of doing due diligence on the business. And through that due diligence, we found a business that, although it's had some tough years in the past with some declining sales in past years, had reached an incredibly stable, diversified base of business where the brands were performing well, and they were starting to see an acceleration that we could see happening and an acceleration that we definitely knew with our focus and abilities that we could increase going into the future. We believe strongly that we can take the base business from where it is today and have it growing at the same stated rate that we currently have on a business that has a much higher margin profile, and are very excited and optimistic about what we'll be able to do with the company and its brands.

Obviously, we are a company that's constantly communicated our expertise and balancing channel strategies on how we are able to use brands across different customers to generate the best benefit for everybody across the market, and by having these brand portfolios live together, it gives us more options to do that more efficiently and serve the market we think in a way that will be better for everybody involved in the value chain -- consumers, retailers, us, our shareholders, to name a few of those people that we believe that benefit from the benefit of the combined company.

From a synergy perspective, as we stated in the script and you'll find in the release the number of comments about it, we have a number of things that we both do today in the area of how we market our products and how we go to market that we believe create easy areas where we can drive synergies into the business. Through the last 60 days of due diligence, we've identified what we believe are very easy to achieve synergies for 2020 of an incremental $3 million of synergies, growing that to over $5 million on run rate basis in the following year in 2021. Kevin, you always do this to me, you ask 3 -- 6 questions in 1 question. So did I miss one?

Cord, it may be just one more, the follow-up. Actually, two, I'm sorry. Just build upon what you think the growth rate of this portfolio as you touched on it has been a portfolio which has struggled in the past, and some of those struggles have come at PetIQ's benefit from a market share perspective. So maybe comment on what you think the growth rate is for that portfolio specifically going forward. I think that would be helpful. And then John, just from a free cash flow perspective, what are you targeting now? I think you said you reduced the debt leverage by about half a turn per year. Is that suggesting you think that the levered free cash flow for this business somewhere in the ball park of what, $40 million-ish or so a year? Just if you could confirm that.

Yes, Kevin, I -- right now, again, it's early. We're in the process of 60 days of due diligence. But looking at where they've invested some of their time and been more aggressive, and where we haven't, and look in the balance of what those channels are producing, and some of those relationships there, we feel very good that just the base Perrigo portfolio can grow at least at the 15% or better year-over-year. We have benefited -- obviously, our model is extremely strategic. Our platform carries a lot of strength with it and we believe with the brands that already are at a place where they're now growing with that, we feel very good about our ability to maintain our similar growth rate across their business as we have across our business. John, would you take the free cash flow question?

Yes, certainly, Kevin. This is a cash-generative business. After we pay taxes, service our debt, invest in CapEx and networking capital, we'll have the ability to cover our 1,000-clinic roll-out plan and generate $30-plus-million of free cash flow on an annual basis, all while reducing our net leverage by 0.5x a year.

Our next question is from Brian Nagel with Oppenheimer.

Congrats on this quarter. I have a few questions here. First off just with, starting off with the acquisition, it's a follow-up to the prior question. But how complementary are the product portfolios of Perrigo and PetIQ at this point? And then to what extent are you -- when you look at the Perrigo business, is that company already serving the same partners, the same retailers, that PetIQ is serving? And I'll have some follow-ups after that.

Yes, Brian. So first, from a customer perspective, we do have definitely a similar list of customers and overlap but we both are doing business with a lot of the same customers. The good news is, is we have a bunch of customers where we have significantly stronger relationships and they have a few that they have stronger relationships. And the combination of the teams, we end up with a very strong portfolio of customer relationships as a total company and we view that as one of the positives that come out of the transaction. Remind me your next question, Brian?

No, just -- well I guess the other part of that question was with regard to the product portfolios right now, the 2 companies, the overlap in the products.

I think we've always stated that we weren't out there looking for acquisitions just to buy companies, that the acquisitions that we did had to hit the middle of the bulls-eye for a company that had a complementary portfolio that was focused on animal health. And the name itself says it, Perrigo Animal Health is a company focused -- that has 330-plus items they manufacture, all of them basically over-the-counter items that focus on the health and wellness of pets and definitely in the -- in skewing towards affordable pet healthcare which is our stated mission. So it's incredibly complementary. And again if you look at the categories that they're in with flea and tick and dental and all of the other things that they do, it's absolutely complementary to our portfolio and to the market, and just accelerates our ability to be a broader-based, diversified company that can serve our stated mission of providing low-cost pet healthcare for pet parents.

Got it. That's helpful. And then just shifting gears a bit onto the service business. So you reiterated the intention to open 80 centers here in 2018. You opened 0 in Q1, you're going to open 7 in Q2. So that deep back-end-loads the openings into Q3 and Q4. Talk a bit about just what's involved I guess there are a couple questions here. What's involved in actually opening -- how -- with the logistics, whatever else, actually opening these centers. And how many of those locations are already identified and sort of say in the -- identified is probably the best word.

We're lucky to have Susan with us, and with her being so close to the business I'll let her take the call -- take the question.

Thank you for the question. We are definitely on track to open our 80 wellness centers this year. As Cord mentioned, we're going to be opening 7 in Q2 with the balance coming in Q3 and Q4. Once we can confirm the exact timing, we will definitely make sure that we share that information. But to your point, the complexity right now, we're working through the complexity of filing documents, permits, etc., with cities, all the legal requirements that we need to check the boxes on. Those are the pieces, the bits and pieces that can pretty much give and take throughout the process. But I do want to reinforce and reiterate that we will be opening 80 this year, and those 80 centers have been identified.

I would just add...

Just one final...

Brian, I'd add one more comment to that. The locations are going into existing stores that have existing spaces that are basically white, vanilla shelves. And we go in and we have an equipment package and a paint package and decals and signs. So once we start construction on a location, they're usually done in about 3 weeks, 4 weeks at max. It's a very simple installation to execute. Very seldom are we having to move walls and do major construction.

That's helpful. And then just one final question, I guess it's probably for John. So John in your prepared comments you talked about vendor rebates, it's been topical lately. The question I have there, maybe just explain a little further, the accrual of those rebates? Is this -- is there a dynamic where you accrue these over some length of time? Or are they typically recognized in quarter-by-quarter?

Yes. So there's a couple different things. It's how you value inventory and the revenue recognition associated with it. It's a standard practice of pricing among the animal health manufacturers. They're consistent for all purchases. Said differently, they're not tied to volume. Accounting for these, Brian, is virtually the same as accounting for off-invoice allowances. We value the inventory at the lower cost to include the rebates, and then we create a receivable that is paid in full within 90 days on average. This is something that our outside audit partner pulls over 1,000 samples to validate on an annual basis.

Our next question is from Joe Altobello with Raymond James.

I'm going to focus as well on the Perrigo acquisition here. I guess first it sounds like they've lost a fairly sizeable partner or customer, in 2018. Give us a little more color there, and if there's an opportunity to get that customer back?

Yes, I think it actually is tied, Joe, to them losing a manufacturing partner, one of the major animal health partners. And which affected business across all their customer base. And we actually were the recipient of that business, and so it's already alive and well at PetIQ and was part of some of the field growth we had last year. They haven't lost any customers from a retailer perspective, but again, it affected both a distribution item that was being produced by that manufacturer, and a generic version of that item in the PetArmor brand. So it's -- like I said, it's a non-issue for the business going forward, and we'll be in great shape.

Okay. Great. And then secondly, your sort of mantra has always been to make vet-grade products more accessible to pet owners, and you've obviously done a very good job of that. And I'm just curious, how does -- how does the Perrigo business fit into that? Because I'm not sure if you would consider that sort of vet-grade, if you will? It's more opening price point, generally speaking. So sort of speak to how that fits in with that strategy?

So their manufactured products actually are very similar from a formulation and registration standpoint to ours, Joe. They include generic flea and tick formulations and manufacturing of the major brands that are in the market. The PetArmor Plus brand has been the most successful generic flea and tick brand in the market, both in unit and dollar volume movement. And so that would be an example, and there's many more like that. So I would not put them just in the opening price point. I would put them in the right value price point, to where they're a solid provider of value of leading formulations and registrations with a very solid brand portfolio that they've done it through the -- you know, the Velcera company that Perrigo purchased had the PetArmor portfolio and then Sergeant's has been around for a very long time providing a very full portfolio of health and wellness items to the market. And we couldn't be more excited about what it is they do, how they do it, and how it fits into our plan. But it definitely would not be considered opening price point. It would be kind of the perfect value for what they're providing, very similar in pricing and formulation to what we do with our manufactured line.

Okay. Great. Just one last one on the wellness centers, the 80 that you're opening, 80-plus that you're opening this year. Have you been more interactive with the retailers in terms of site selection, and how big of a deal is the access to vets?

Susan, would you like to take that?

Absolutely. Yes, and thank you for the question, Joe. We have -- I think we talked about this about 6 months ago, where we actually really changed up our approach and we focused on a couple of different strategies. Number one was driving pet traffic, but number two was operational efficiencies. And tied back into operational efficiencies is really about choosing the right locations and the right centers. We really started to dig into the data, to understand locations, to understand demographics. And that moving forward, we really developed a model that helps us to be able to identify the right centers. So with our partners, it's been a very iterative process where we have gone back and forth looking at specific ZIP codes, areas, and I believe moving forward as we continue to choose these sites that -- we will choose sites that are very much a win-win for both our retail partners and ourselves.

And on the access to vets, is that a problem at all?

You know, it's interesting because we -- we actually have developed a model that works incredibly well, particularly for the veterinarians. What we do is we offer a lot of flexibility in regards to how we employ our veterinarians. I think that we offer both part-time opportunities as well as full-time opportunities, and that allows us to have really a pool of veterinarians to continue to partner with in all of these centers. It's a unique model and we develop that model based on our community clinic portfolio. And really what it's done is it's translated over to the wellness centers. So the staff and the team that we have that do constant vet recruiting really have the ability to offer up to veterinarians a lot of opportunities in order to be able to partner and to come to work with us.

Our next question is from Jon Andersen with William Blair.

Lot to cover here. Trying to boil it down to a few questions. Beginning with the Perrigo acquisition, can you talk a little bit about you're acquiring a manufacturing facility here. My understanding is this is a 100% over-the-counter business today. Is there any intent or possibility over time to kind of utilize the manufacturing capacity to do anything on the prescription side of the business? Point one. And point two, how do you think about kind of conflict here, managing conflict as your own brand portfolio gets bigger here with this acquisition, and the conflict that that may or may not kind of pose with some of your supplier customers in the animal health space? Thanks.

Jon, the plant is focused on OTC and we do not see it as a plant where there will be prescription product being produced. It's not the focus of the plant or the company to do that in that facility. We obviously are only into this transaction a few months and we've got a couple months before it will close with more work to be done, but we right now don't believe it'll be a prescription drug manufacturing facility. It's not the intent of the company. We are going to look at best practices between plants and look at opportunities to find ways and synergies to use the right locations to produce the right items. And so we're excited about looking at that and exploring those opportunities as we get deeper into the transaction. Remind me, Jon, your second question?

The second question was just as your own brand business gets bigger here --

Yes, the conflict?

How you kind of manage the potential conflict or relative to some of your existing branded suppliers.

Yes. Well, first and foremost, again, the formulas and the products and the pricing have all been well-established in the market for a very long time. We've been operating in partnership and the new contracts and direct relationships we established took place after that part of our business was well-established and running, and frankly a strength to showing how we can be a great steward to the total industry to balance how we do business and conduct ourselves as a company in that position. The Perrigo Animal Health business has again, been out there for so long, it's been well-stabilized with that competitive major in place. And we don't see any change or impact to our current partnerships with our existing partners in the marketplace. Again, because it -- there's nothing new here that's going to just overnight jump out as being new opportunity, every retailer is carrying a generic portfolio and a brand. The brands are doing extremely well and growing, and happy with that growth. And everybody's doing extremely well in retail as we're bringing the message and providing access to affordable animal health products through these retail channels, and bringing new pet parents into the category.

Thanks, that's helpful. There was some news earlier in the week, Walmart has made some announcements around its pharmacy program, stocking more pet medications, an online program, and also expanding the number of locations in which it has vet centers in it. Can you talk about your relationship with Walmart if you can, and are these positive developments for you? I assume that you're taking the preponderance of those new locations and that the expansion of the pharmacy program and the online effort would be again, part of this migration to retail which is your target, i.e., this would be a beneficial thing for your volumes and sales over time?

We view the announcement as super positive for us, Jon. It's affirmation in the market, of what you've been telling them for a long time and what we're doing and how we're conducting ourselves with Walmart. We are the majority of the locations that are being discussed relative to the expansion of wellness centers, and they are a big part of our plans for the expansion we have going on with our 80 locations this year. So we're excited about that. It's just great affirmation to finally have a public statement from Walmart relative to the importance of providing low-cost pet health care through their stores. And so it's exciting for us. The expansion of the pet prescription program online is positive for our business and we're excited about that expansion, and we expect it to generate positive results for the company. So it's -- like I said, all the way around, a very positive announcement for PetIQ.

Great. One last one for me, maybe it's Susan on the service business. You shared, obviously there was good absolute growth in the service business this quarter, and very strong margin performance. Congrats on that. My question is, are you able to share a little bit more around the performance of both kind of the base or your mobile clinic business, the performance of the fixed centers, and what you're seeing -- a little bit more color around kind of pet counts, and how you're seeing that ramp? You did talk about contribution margin, 30%-plus, but you didn't really mention the revenue per location. So any color you can provide there, just around some of the underlying performance metrics and the levers that you're pulling in that business to continue to drive adoption? Thank you.

Yes, I'd be happy to address that. Yes, sure. I'll go back to what we were talking about several months ago, which our focus was very much on number one, ensuring that we understood how to drive that pet traffic, and then two, those operational efficiencies. A couple of items that I'll bring up that we talked about, number one, we talked about hiring an agency of record that helped us to geotarget around our clinics. We have found that program to be very effective in driving pet traffic. We also talked about operational efficiencies like adjusting hours to better meet pet owner needs. We have implemented that, and that has also had a positive impact on our pet owners as well, too. I will -- we talked about choosing locations and the robust set of metrics that we're using. We put that into place and that has also had a positive impact as well, too. I literally think that we're seeing the results of our hard work as a team. I, I probably should say we, couldn't be prouder of the services team. We really have set a land speed record. I want to share that in March we actually recorded our best month in the history of the company. So my answer is that we are testing, we're learning, and we're applying. And I'll go back to the point that Cord made, in his original statement. We had 3 wellness clinics that opened in November. We applied a different set of launch criteria around those. We supplied a different set of criteria around the choosing of the locations. And those 3 clinics are providing a positive EBITDA contribution to the company. So we continue to dial in and continue to apply our learning.

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

You may have broken this out before, but can you just give us an idea of the breakout of the Perrigo business kind of within animal health, like, how much is flea and tick, how much is other things? And also with that, how much is PetArmor which seems the direct overlap?

Yes, Bill, we appreciate the question. We're not prepared to lay out by product or by category sales. I will tell you I was incredibly impressed at the concentration of any one brand or any one product and any one customer to where the business is incredibly diversified and the base is incredibly stable, and is -- turned the corner, is back in a place where it's growing.

And with that, I mean, could you maybe tell us how much is premium? I know Sergeant's is much more of a value brand so I didn't know if it's largely towards the premium or if it's -- if it's kind of a mix?

It's significantly more of the premium products from a volume standpoint, and you've seen even the significant expansion this year from a door count standpoint for the PetArmor brand being accepted across the major pet specialty retailers. So we see that number even going the right direction. It's also had great momentum in some of the online retailers as well, which was also impressive in the due diligence process. So the premium is definitely the bigger share of it by a significant amount.

And with regards to the acquisition price, and going back 6 months ago when you did raise capital, the thought was, we want to have plenty of drive power to roll out, to get to our 1,000 doors. And this really helps having cash in the bank with all the retailers can understand, we can definitely do it, there's no real question on financing. I realize this is not a huge deal, but does this change the outlook for your ability to roll out 1,000 doors or to self-fund 1,000 doors?

John, do you want to take that, please?

Yes, you bet. So there's a $25 million use of cash with the deal as it's contemplated. That will be recaptured within 12 months. And we talked about the free cash flow and I mean, $30 million-plus on an annualized basis. So said differently, Bill, this does nothing to slow our projected growth and we still have the ability, should we choose to do so, to expedite the growth.

Q; Okay, and then last one for me, just going back to a question on actual earnings. How was the start of the overall flea and tick season? I mean, I remember last year weather kind of slowed it a little bit, well into April, and it would seem that we had at least from other companies I've seen, that March still wasn't that much better but April came kind of roaring back. So just trying to get an understanding of, you had a good quarter on flea and tick but can it still get even better as we move into the rest of the season?

That's a great question, Bill, and we appreciate it. The -- as we said in my script the start of the season was actually very slow. I should back up. January was great. Unit movement and volumes weren't great in January, never are, but from a comparably year-over-year it was fantastic. February and March were horrible. It was horrible weather across the country and the category when it hit kind of the end of March, was negative 4.3%. Topical was actually much more negative than that because of the just size of the category. April came roaring back and by the time the April 20th data posted by Nielsen, the year-to-date number had got back to where topical was flat year-to-date. It recovered all the negative position in the first quarter and the total category was positive 2% as a total in just that 20 days in April, it recovered the entire first quarter's negative position. So we've seen it roaring back. Obviously our business is incredibly diversified. We have a lot of contributors. We have both the prescription and the topical business that is a big part of our business. And many other things that contribute. And so obviously we feel very ecstatic about our $148 million in revenue and the 29% year-over-year and the record quarter we produced. And for us record earnings from an EBITDA perspective. So we really did hit on all cylinders and even in the kind of headwind of bad weather and bad start to flea and tick, the company continues to prove that the model that we've built and how we're executing it is able to withstand even a slow start to flea and tick season.

This concludes the question-and-answer session. I would like to turn the conference back over to Cord Christensen for any closing remarks.

Just wanted to thank everybody for joining us today. We obviously started off 2019 with a bang, with great results, and obviously the announcement of the definitive agreement to acquire Perrigo Animal Health. The company couldn't be more excited about the pet parents, the customers, the employees, our other partners and our shareholders that continue to support us and make it all possible. We couldn't continue to deliver the results we deliver without all of your support and we appreciate everyone that's helped bring us to this point and drive the success of the company. We look forward to second quarter and we look forward to continuing to move forward with our closing of the Perrigo transaction and being back with you in just a few months to talk about the company and its performance for the second quarter. Thanks for joining us and we look forward to hearing from you soon.

This concludes today's conference call. You may disconnect your line. Thank you for participating and have a pleasant day.