PetIQ Inc (PETQ) 2019 Q4 法說會逐字稿

Greetings. Welcome to PetIQ Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to Jeff Sonnek, IRC. Thank you. You may begin.

Good afternoon. And thank you for joining us on PetIQ's Fourth Quarter and Full Year 2019 Earnings Conference Call. On today's call are Cord Christensen, Chairman and Chief Executive Officer; and John Newland, Chief Financial Officer. Susan Sholtis is also present and will 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 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 the reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

In addition, PetIQ has posted a supplemental presentation on its website for reference.

Now I'd like to turn the call over to Cord Christensen.

Thank you, Jeff. And good afternoon, everyone. I will review key business highlights since our IPO in 2017, provide a brief look at our 2019 performance and close with insights into our business segments. John will discuss our fourth quarter financial results and 2020 outlook in more detail. Finally, Susan, John and I will be available to answer your questions.

At PetIQ, our business model provide an affordable and convenient access to veterinary products and services, continues to gain momentum and is illustrated by our ability to generate sustainable growth. Since our IPO just 2.5 years ago, PetIQ has gone from net sales of $267 million in 2017 to a business generating at least $800 million in net sales by the end of 2020. Adjusted EBITDA has grown from $22 million in 2017 to an expected adjusted EBITDA annualized run rate of over $100 million in 2020 upon the closing of our Capstar acquisition. This represents a 45% net sales CAGR and 65% adjusted EBITDA CAGR over this time period.

In 2019, we generated another strong year of growth. Net sales increased 34% and adjusted EBITDA increased 46% compared to 2018. This is a clear indication that our mission of providing convenient access to affordable veterinarian products and services is increasingly resonating with pet parents seeking smarter pet health care. We've accomplished this growth both organically and via strategic acquisitions. Our team has done a great job of finding compelling complementary opportunities for growth in the veterinarian products and services industry to further strengthen and diversify our business.

In the last couple of years, we have integrated 3 strategic acquisitions. We recently announced the signing of a definitive agreement to acquire Capstar in 2020. This will be our fourth acquisition, enabling us to yet, again, enhance our competitive position and consolidate the industry while improving our mix of higher-margin sales. In 2020, approximately 80% of our adjusted EBITDA comes from our own brands manufactured in our plants and our service business, providing us significant control and strong visibility into our outlook for 2020 and beyond.

The acquisition of Perrigo Animal Health, which closed in July 2019, is a significant component of our margin expansion strategy within the product segment. With more than 700 highly accretive and manufactured pet health and wellness items, this state-of-the-art manufacturing and R&D asset provides PetIQ significantly greater manufacturing scale and provides a very important addition to our offering with its national pet health and wellness brands such as PetArmor, SENTRY and Sergeant's.

To date, the integration of Perrigo Animal Health is exceeding our expectations. As we mentioned during the third quarter call, we believe there is a good opportunity for us to outperform the 15% sales growth goal that we had initially set for this business. I am pleased to report that we now expect sales growth for the Perrigo Animal Health business will be up approximately 25% year-over-year in 2020.

After closing the Perrigo Animal Health acquisition, we identified that the business was under-investing in its most important brands. This lack of support attributed to a deceleration in sales prior to our ownership. PetIQ has made the decision to reimplement these marketing investments to ensure that we deliver the annual 15% sales growth goal that we have placed on this asset. Said differently, we have fixed this issue for 2020 and beyond and have applied a more complete marketing and advertising budget for this business, which matches the historical spend that was in place prior to Perrigo's acquisition of the asset.

Effectively, we have reallocated approximately $6 million of EBITDA that was originally forecasted for 2020 towards this marketing budget. As much as we'd love to let this fall through to the bottom line, this is not the correct business decision for an asset that we have increasingly high expectations for.

Shifting to our business segments. Our product business demonstrated continued momentum with fourth quarter growth of 42%, supporting full year 2019 growth of 37%. We continue to benefit from the strength of our relationships with our animal health manufacturing partners, an acceleration in our manufactured brands and an increasing number of pet parents transitioning their pet health care needs to PetIQ's affordable and convenient offerings. Through greater access and consumer visibility, we are encouraging new customers into the category, which is helping grow the total market. Our partners are all growing with us, and all parties are motivated to continue to support the growth and win together.

We continue to experience strong, broad-based growth across all retail sales channel, with e-commerce leading from a sales channel perspective and prescription drugs leading from a product category perspective. Several of our large customers have increased their commitment to pet prescription drug programs. This is a strong tailwind for us and an area of our business that is still in its infancy with a long runway of opportunity ahead.

Our aim is to provide value to the entire pet medication ecosystems, and the best example of PetIQ's value to the industry is the prescriptions that our veterinarians write. In 2019, our more than 2,500 veterinarians treated over 1.3 million pets, which generated over 1.5 million prescriptions. 45% of these pets treated have not seen a veterinarian in over 3 years. When you combine this with our 1,000-unit wellness center growth initiative at PetIQ, we forecast that we will grow the number of pets treated to over 6 million pets, with a runway to millions more in the future, which is to say that PetIQ will be one of the largest drivers of incremental category growth in the entire industry, providing a direct link to the growth that our vendor and retail partners will enjoy.

In the services segment, fourth quarter net sales grew 22% or grew 20% on an adjusted basis for the year. We reestablished double-digit growth on both a reported and adjusted basis during the fourth quarter following a temporary deceleration in the third quarter that was brought about by a strategic decision to close some clinics with underperforming host partners. Segment gross margin for the fourth quarter was negatively impacted by strategic marketing and labor investments to support new community clinic openings as we back to our wellness center conversion. These investments are clearly generating the desired results, as was evidenced by the 20% growth we generated in the fourth quarter on our base business.

We are proud of the service organization's execution of our 80-unit wellness center growth goal in 2019, particularly late in the year with the additional pressures around the holidays. As we entered 2020, our services business is well positioned for the most important spring season.

In summary, PetIQ's simple mission and 3,500 well-trained employees has created the smartest pet health care company in the country. Our mission of delivering smarter options for pet parents to help their pets live their best life through convenient and affordable access to veterinarian products and services is working. The model is resonant with retailers, animal health manufacturers and, most importantly, pet parents.

Our results speak for themselves. In just the past 2.5 years, we have grown revenues from $267 million to at least $800 million in 2020 and expect to grow adjusted EBITDA from $22 million to more than $100 million run rate in 2020. This is something we are extremely proud of.

PetIQ is unlike any other companies in the animal health industry. We have vertically integrated product manufacturing and distribution platform and an unmatched national footprint with convenient access to veterinarian services, prescriptions and OTC medications at a value.

I would now like to turn the call over to John.

Thank you, Cord. I'd like to reiterate Cord's remarks regarding our accomplishments since our IPO. Having generated a 54% net sales and a 65% adjusted EBITDA CAGR, our mission of providing convenient access to affordable pet care is clearly demonstrated in our top line performance. Couple this with the strategic acquisitions we've completed, and we are a significantly more diversified business with an expanding competitive moat that has multiple high-margin growth drivers that we aim to leverage in the coming years. This will grow our adjusted EBITDA margin to our long-term stated goal of greater than 15%.

We had a great fourth quarter, which capped off a phenomenal 2019 for the business. Fourth quarter 2019 consolidated net sales were $154.3 million, an increase of $43.3 million or 39% when compared to the fourth quarter of 2018. Excluding contribution from Perrigo Animal Health, net sales increased 27.9% for the quarter and 28.7% for the full year 2019. Our strong sales reflects growth in existing retail partners and sales contribution from the recent Perrigo Animal Health acquisition.

Our services segment delivered a 20% same-store sales growth within our community clinic-based business and growing contribution from our non-same-store wellness centers.

Product segment net sales for the fourth quarter were $134.9 million, an increase of 41.8% year-over-year. Excluding contribution from Perrigo Animal Health, product segment net sales increased 28.8% for the quarter. Segment adjusted EBITDA was $17.1 million, an increase of 63% compared to the fourth quarter last year.

Services segment net revenues increased 22.4% for the fourth quarter to $19.4 million. Excluding the contributions from our wellness center initiative, fourth quarter 2019 adjusted services segment net revenue was $17.6 million, representing a growth of 20% versus the prior year. I would also like to bring to your attention that we discontinued operations in 2 of our retail partners that were in the 2018 base. And when backing these clinics out of the base in the prior year period, adjusted services segment growth would have been 24.5% in the fourth quarter.

Non-same-store revenue increased 53.9% and 103.9% to $1.8 million and $8.1 million for the fourth quarter and full year ended December 31, 2019. Non-same-store growth is a result of opening additional wellness centers as well as wellness centers opened in the prior year maturing before moving into the same-store sales base.

Services segment adjusted EBITDA was $1.9 million, a decrease of 11.3% compared to the fourth quarter last year. Segment margin for the fourth quarter was negatively impacted by a strategic marketing and labor investments to support new community clinic openings as we backfill our wellness center conversion.

Importantly, I want to call out the seasonality of the service business here. Fourth quarter is our seasonally lowest volume quarter of the year, and our margin profile is thereby negatively influenced by the lower volumes against the fixed labor costs that we incur. That said, we continue to feel great about the direction of our service organization and the work that we've done to enhance the offering and further refine our community clinic model. These initiatives are driving the lift in total pet counts across our platform, which will drive long-term segment sales growth as well as leverage the fixed infrastructure that is already in place.

Fourth quarter 2019 gross profit grew 21% to $20.5 million. However, looking at our base business through the lens of adjusted gross profit, we grew 37.2% to $26.8 million. As we look into 2020, we expect to demonstrate significant gross margin improvement as a result of improved mix between our distributed and manufactured products.

Similar to the optics in third quarter, general and administrative expenses increased in the fourth quarter due to the integration of Perrigo Animal Health into our consolidated financials. This is a trend that will continue through the first half of 2020 until we anniversary the transaction in July of this year. However, Perrigo's higher G&A run rate of greater than 30% was more than offset by the accretive gross margin profile associated with the Perrigo Animal Health business, which is a key variable in our expectations to deliver a nice lift in adjusted EBITDA margin expansion in 2020. Excluding Perrigo Animal Health, we would have achieved greater G&A leverage for the quarter than the 20 basis points that were generated on an adjusted basis.

Fourth quarter 2019 adjusted EBITDA increased 49.9% to $9.7 million, and adjusted EBITDA margin was 6.3%, which represents a 50 basis point increase from the prior year period. Fourth quarter net loss was $13.6 million as compared to net loss of $5.3 million in the prior year period. However, we reported $11.5 million of incremental expense, which includes adjustments of $8.8 million of nonrecurring acquisition expenses and $2.7 million of incremental interest expense primarily associated with the purchase of Perrigo Animal Health. Net loss also includes $5 million of net non-same-store contribution.

Adjusted net income, which includes the additional interest expense that excludes these nonrecurring items, was $3.5 million for the quarter -- for the fourth quarter of 2019 compared to $2.7 million in the prior year period.

Turning now to the balance sheet. The company had cash and cash equivalents of approximately $27.3 million as of December 31, 2019. In addition to our revolving credit facility, which had $100 million available at year-end, our total liquidity was approximately $127.3 million. The company has net debt of $224.2 million as of December 31, 2019, which translates to a net leverage ratio of approximately 3.2x when compared to our full year 2019 adjusted EBITDA of $60.7 million and including on a pro forma basis the first half of the year 2019 EBITDA contribution of our Perrigo Animal Health asset.

Current leverage does not reflect any balance sheet assumption or contribution from our pending Capstar acquisition. Pro forma for the Capstar acquisition, including the annualized EBITDA contribution of Capstar, we expect an immaterial change to our net debt-to-adjusted EBITDA leverage ratio. We are confident that we have a balanced capital structure in place that can support our rapidly growing product and service business to achieve our stated long-term growth objectives, while simultaneously reducing leverage by one-half turn on an annualized basis through a combination of organic growth and free cash flow.

Now turning to guidance. We are updating the 2020 outlook that we provided in connection with the announcement of the Perrigo Animal Health acquisition last May. For 2020, we expect consolidated net sales of at least $800 million, adjusted EBITDA of $80 million and new wellness center openings of at least 130 clinics. This represents more than a 62% increase in our pace of openings compared to the 80 units we opened in 2019.

As we stated previously, our community clinic conversion strategy is the primary feeder for the new wellness center openings, representing approximately 60% of our future openings. These conversions have significant operational advantages, such as existing labor and engaged customer base, strong retailer-host relationships and lower capital investment. As a result, our ramp to positive cash flow is significantly accelerated, which we believe mitigates risk and dramatically improves our visibility for success.

Our 2020 outlook reflects the full year impact of our Perrigo Animal Health acquisition, but does not yet include contribution from our pending acquisition of Capstar, which on an annualized basis to contribute approximately $15 million of incremental revenue and $20 million of EBITDA. As a result, we already act as a distributor for the vast majority of Capstar. So our revenue capture is more limited to the margin accretion we will gain upon closing.

Including the Capstar contribution, our 2020 guidance implies that, on a run rate basis, revenues will exceed $815 million and adjusted EBITDA will be greater than $100 million, representing growth of 15% and 65%, respectively, versus our 2019 results.

We remain confident in our long-term 2023 growth objectives, including net sales growth of 15% and adjusted EBITDA growth of 20%, resulting in an adjusted EBITDA margin of greater than 15% in 1,000 wellness center locations.

In closing, we are very pleased with our 2019 performance 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 Joe Altobello with Raymond James.

So first question, I wanted to get a little more color around the $1.2 million in strategic marketing and labor investments that you guys made in the fourth quarter. What specifically was that? And was that contemplated in your prior EBITDA guidance?

Thanks for the question, Joe. I think I'll let Susan take the question on the $1.2 million, and then I'll take the guidance question after she finishes answering that. So why don't you go ahead, Susan?

Thank you, Cord. Joe, I, first of all, just want to pause for a minute and really recognize the services team for delivering the best quarter that we've ever had. The team completely rocked it.

The #1 question, as you know, that I always get is whether or not you're actually going to open up 80 wellness centers. And the answer is, we definitely did that. I want to walk you through the unique opportunities that we had in Q4 that we took advantage of. Number one, we launched another 82 locations for community clinics and held over 2,600 additional clinics in Q4. Second, and probably more importantly, this opportunity happened with 9 partners. 6 of those 9 partners were brand-new partners for PetIQ. So our clinic events and our total pet counts were up significantly in Q4. We, moving forward, will continue to look for smart opportunities to fill that community clinic funnel, as we talked about previously, and continue to smartly invest in the incremental advertising that's needed to support that.

Joe, on your -- the second part of your question is, when we updated guidance, our reiterated guidance here recently, at that stage in time, we did expect to be at that guidance. And we're waiting on final reconciliations to come through, and we had contemplated that strategic investment have been made. So when those reconciliations came through and were finalized, we were disappointed that we were a little over $1 million short of the guidance that was there, but also still extremely proud of the fact that we grew the quarter by 49% on EBITDA, and we grew the year by 46%, which is more than double of our long term guide. And obviously, has been a trend we've been delivering now going on 10, 12 quarters. So we're -- you obviously never like to miss on something like that. We're also very excited about how well we did perform for the total year with all the things that were going on between acquisition, integration and you name it. But again, yes, we were still waiting on some reconciliations that came through and it -- kind of had a small, slightly short of that $62 million guidance.

Got it. That's helpful, Cord. Maybe if I could move along to the wellness centers that you're expecting for this year. I guess, first, any early results from the new Walmart wellness centers? I think you guys are opening roughly 50 with Walmart in the first quarter. And of the 130, are those all with existing partners? Or do you anticipate new retail partners?

Yes. Thanks for the question, Joe. So first, Joe, we have a total of 50 locations with Walmart, of which 35 we opened up in fourth quarter, 15 in the first quarter. I think the other part of your question, I'll let Susan take and answer. She can handle it very well.

Yes. I want to talk about a couple of different things. Number one, I want to talk about the conversion of clinics that have now flipped over to the greenfield clinics. So the conversion clinics, if you recall that we opened in November 2018, plus we had an additional 5 conversions that we opened this past summer. Those continue to perform well on all metrics: pets per clinic, dollars per pet, total revenue. If you remember, we love these types of conversions because right out of the gate, they're hot and running because we've already built that client base with our retail partner. We can especially see the benefit of those conversions as we start to break through the winter months, which is happening right now.

In regards to the greenfield clinics, they are also performing well, the brand-new greenfield clinics that we launched in fourth quarter of last year. I'll give you an example. If you take the old greenfield clinics, the ones that we closed, and you measure how they were performing in June through August of 2019, now remember those are the most active months in veterinary medicine, and we were spending to drive pet count. And if you compare those to the new greenfield clinics just in the months of January, February of this year, the most inactive months in veterinary medicine, and after the clinics have only been opened for 2 months, we are seeing increases in pets of 16% to 20% and increases in dollars per pet by 34%. So the new locations are without a doubt headed in the right direction.

And in terms of the new openings in 2020, is that all with existing partners? Or are you -- is that with new partners?

Right now, we currently are targeted for the 130 with our existing partners, but we've built a deeper funnel than that 130, which includes new partners. But with the 130, they will be with existing partners.

Our next question is from Kevin Grundy with Jefferies.

I wanted to start, maybe this question is for John. Just to come back to gross margin, and 2 parts to the question. I'm not sure if you have this handy, but do you -- could you walk for us sort of what were the drivers of the year-over-year change? Because, I guess, in our model, and maybe we were missing something, but I think The Street was expecting quite a bit higher as well on the gross margin. And at a minimum, I guess, there should have been some favorable mix from the Perrigo acquisition. So what maybe came in a little bit worse? The investment, unless I'm missing it, I would think, would be an SG&A number, not something that would flow through COGs, but I could be wrong. But even if that were the case, it's -- that's not a huge number, like the additional $1 million, I think it would be like 65 basis points. So the question is around gross margin. And maybe you can do a walk for us year-over-year to get us to the 34 basis point decline. And then maybe talk about why you think that gets better next year.

Yes, that's a couple of questions there, Kevin. But yes, first of all, I believe that you would find that when we examine margin on the product side of the business, that we were right in line with overall expectations. When we talk about the investments that were made in Q4, a large portion of those investments were labor-related, which is a factor of cost of sales, which ultimately affected margin in Q4 of this year. And additionally, last year, we had a product promotion in one of our animal health vendor partners. We conservatively accrued that -- the program benefits of that throughout the year. But we did receive -- we did realize a pickup in Q4 when we did the year-end reconciliation of that program.

What was different this year, Kevin, is it went to an off-invoice where it was recognized with our purchase volume throughout the year. And so therefore, just happened as the year occurred. So you're anniversary-ing basically a onetime pickup associated with that promotion last year.

I will say this, though, despite those investments we made and the things that we're talking about, our annual percentage margins were actually 20 basis points better than the prior year on an annualized basis.

Okay. So it doesn't seem like there's anything concerning. I guess, the top line continues to be really strong, but it did seem like -- I guess, what has been thematic is that there hasn't been as much sort of earnings flow through, I guess, probably even as much as you guys would hope relative to how strong the top line has been.

Yes. No, remember, Kevin -- go ahead, Cord.

Kevin, you're referring to the service organization or total company overall?

Total company, Cord.

Yes, I think we have made significant improvements in the earnings flow through. I think -- look, we have 3 lines of business with 3 very different margin profiles. And the mix is something that we're always trying to balance as we get to have the job of determining how quickly people are going to move over in the Rx business versus the service organization. I think that John's point is we budgeted and knew that we were going to have a margin, the service organization that was going to be compressed during this time period. It was part of our plan to still deliver a $62 million EBITDA margin. We did have a slight miss in that we can understand why that is controllable going forward. Our margins are expanding as it relates to the acquisitions that we made.

To say we're not seeing earnings flow through when we were making $22 million in '17, and we're now at $61 million and moving to $80 million to $100 million with the Capstar, we've got a lot of leverage going through on that, and we have a lot of expanded margin profile flowing through the business. So I take exception to your comment.

Okay, got it. It's all right. Cord, just one more, on the -- if I heard this correctly, the -- it was $6 million in step up for Perrigo in 2020. Is that correct?

Yes. So shortly after we closed on the transaction, we were able to get more historical data and get deeper in the weeds with the existing employee base. And the Sergeant's Velcera team that was left in place were able to show us investments that were being made and the productivity of the brand with those investments. Perrigo had a philosophical approach based on their model not to make those investments and had cut those spends. And you can see the decline in the best-performing brands from those investments. As we were able to go out and look at the gaps in the marketplace, fill those gaps with our focus, drive the top line increase, it allowed us to go back and put those investments back in place for 2020 without expecting the $80 million of earnings. So as said differently, if we spend money exactly the same way in 2020 as we did in 2019, the business would make $86 million on the $800 million. We feel strongly that those investments are important. We feel strongly that they'll be measured and that we'll be able to show that, that will be a big part of us being confident in our ability to say we can continue to grow the best brands out of that acquisition at the 15% that we've met -- we've already matched to The Street.

Okay. And just the clarification, Cord. So The Street should think of it is that that's a permanent investment. That's not something that's going to come out of the P&L in fiscal '21. Is that accurate?

Yes, we're going to make a permanent investment, that $6 million, unless we see the results are different. And if we decide that we're not going to do it, we'll make sure we let you know that those spends aren't producing the return and they're better use elsewhere. So -- but right now, we're assuming that those marketing dollars that were used for years that drove growth that were removed at the start of the decline, we're going to find out just how productive they are when they're in place and intended to be in place for the long term.

Congrats on the year.

Our next question is from Jon Andersen with William Blair.

Congrats on the year. I'd like to ask about the cadence for 2020. So with respect to the guidance, if you could talk a little bit more about quarterly cadence with Perrigo Animal Health impacting the first half, and then Capstar, I guess, rolling it in the second half. So any color you can provide there would be helpful.

Yes, Jon. This is John. I'll go ahead and take that. When we look at the cadence, we need to consider the full year effect of adding the Perrigo Animal Health business, right? As a rule of thumb, you should expect a 2% to total higher contribution in Q1 and Q2 of this year, with the corresponding effect on the back half, right? So said differently, last year, we only had Perrigo Animal Health as part of our business in Q3 and Q4. So that is the cadence change that you should expect to see over what occurred this year.

We haven't really talked -- on the second part of your question, we haven't disclosed what we expect the full impact of the Capstar deal until we know the closing date. But we do expect to update the guidance at that time.

And I think, Jon, just to add to his point, though. I mean, if you think about the Capstar transaction, we were already handling such a significant portion of the distribution of that deal, that when we closed, that the top line will only be impacted by $15 million. And so we will give you clarity on how that changes the seasonal impact of the percentage of sales. But I think John said it right. If 18% of our sales were in Q1 of 2019, you should see roughly 20% of our sales in Q1 of 2020 and then flow through, just as he described.

Okay. That's helpful. Could you talk a little bit -- maybe a little bit more about the -- given what you've seen out of the more recent wellness centers, whether, I guess, converted in greenfield. What's your current thinking on kind of run rate economics for those -- for the centers? How quickly do you get to cash positive? And longer term, how do you think about kind of revenue and contribution margins?

Thanks for the question, John. I don't think our communication is different than what we've been telling you. On the greenfield, conservatively, we believe will be a profitability within a year. Some of them will happen sooner than that. We've seen it happen faster that in a number of cases. But to be conservative within a year, we're still very confident that we can be in that $400,000 to $600,000 in volume. Some will be more than that. But we do feel strongly that, that midpoint of being able to provide that 25% EBITDA margin over those locations are the same.

We have a lot of confidence in the greenfield locations based on what we're initially seeing out of them. But again, starting with no customer base, no previous community clinics being run there, we're going to stick with the 18-month communication that we've maintained in the past and expect the same results coming through. So we've seen some really fun things out of these initial greenfield locations at Walmart, as we've been able to use our funnel to make the selection. And we'll give -- we'll update our position on that as we get more information. But right now, I think what we've been providing you from an information standpoint, we should stand by and you should count on.

Great. Great. That's good to hear. Just one more. As you thought about kind of your 2020 guidance, was there anything that has changed in the last 3 or 6 months with respect to your thoughts on your distribution business, whether that be direct to brick-and-mortar retail or e-commerce? Or is it kind of status quo there overall?

Thanks for the question, John. I think when you think about the last 3 and 6 months, we've had record quarters driven off of how great our relationships have been with our partners. As we've said, our continued investment in growing the business and growing the pet count and bringing business to our partners, we continue to believe is a motivation for everybody to continue to invest in PetIQ in the right ways in driving the business.

We have the contracts that we've always described to you and their terms are what we've described. So we'll be having discussions towards the end of this year about what happens beyond that. But we've seen no change. And obviously, the numbers reflect how strongly they're still running. So we're still in a place where we have great relationships with our partners and feel like the -- it definitely gets stronger as we continue to help everybody just grow and participate in the growth that's here. There's just so much incremental business being brought through this channel that we feel excited about the future and the likelihood of those renewals. So...

(Operator Instructions) Our next question is from David Westenberg with Guggenheim Securities.

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build out new products with that. And as a follow-up to that, the spending that you're doing with Perrigo, is there an opportunity to maybe use that spending to help market Capstar and just getting some synergies there?

Dave, you were -- we didn't hear the first part of your question. I think you're muted or something. So if you could just give us the first part of your question, again, that would be really helpful.

Yes. When you're talking about the reallocation of marketing spend on Perrigo, is there any maybe additional -- or some spending in that, that might go into product development, R&D spend? And with that excess spend, is there any opportunity to use some of that marketing spend and allocate it towards Capstar? I'm basically just trying to get some color between maybe there's some additional synergies here between your prior Perrigo acquisition and your new Capstar products that you'll get midyear.

Thanks for the question, Dave. I think -- the first thing, I think, we would like to make sure we're clear is that those investments were directly linked to the business we bought at the Perrigo business and making sure those brands are being properly supportive to drive their growth. And right now, that money is allocated to those brands. And that's where it's being placed and invested. And that business growing at 15% is a very healthy business. Obviously, when Capstar gets integrated into that plan and the fact that it's a brand portfolio with no employees, we will definitely look at how we advertise and support that brand. The good news is, that brand had great investments being made against it. And right now, until we get the rest of the information, don't believe there'll be an incremental or additional investments needed to support it.

You always get synergies when you have a bigger book of business with your customers and when you're doing your ad spend. So there'll definitely be synergies with the total investment being made across both the brands at Perrigo and at Capstar. But that $6 million won't be where it's at.

The last thing you asked about is how do we leverage that with R&D. And I think the company is, one, has a lot of ways that we're investing in R&D and having projects brought to us, all of which will benefit the total company and benefit the total brand as different things are -- product extensions, product enhancements, improvements, items that are, at some point, will come off a patent that we'll look at being part of our strategy that fits in very well with our stated objective, to have items that hit the bull's eye of providing affordable access to animal health products. And so we're not underinvesting there either. That's just another bucket where we're investing time and money and have some great projects on the board.

We're already working to enhance both the Perrigo brand and the Capstar brand with improvements and then brand extension. So I think we'll be excited to talk to you about those. Those are something we're ready to talk about. Obviously, we don't like to disclose what our R&D projects are for competitive reasons. But it's a different bucket, Dave.

Okay. And then there's a little bit of change in language from above 130 to -- from 130 to 170. Can you just talk about the achievability of maybe a 170 number? Is it only just bringing in new retail partners? Or is there any other kind of ways to achieve sort of blowing out that 170 number?

Yes. I think, first and foremost, Dave, if you think the ramp that we've gone from as a company, where we opened up 3 clinics in fourth quarter of '18 -- so opening up 71 clinics in 2018, we're proving to get a lot done in a very short period of time. What we do though understand from this last 18 months of opening clinics is that we have to balance all 3 major areas that support openings. The construction and real estate part has actually become the easiest part of opening the clinics. Having the right balance in our human resource area for hiring both the veterinarians and the techs and making sure they're ready to go, which we feel like we have a great handle on in that cadence and what the right pace is there.

And then lastly, just operationally, when you talk about just the pet count that comes with that and the amount of operational days that come with opening 130 locations, we're balancing the cadence and increasing that cadence across all 3 of those operating areas. We will maximize it every single year. But if you think about taking your graph and just starting to draw the hockey stick of 9 locations to 100 locations to 230 locations and continue to follow that hockey sign -- lineup, I think we're on the right trajectory still to get to 1,000 that we've communicated to. So is it possible to do 170 this year? We have enough deals to be done to do that. Will we do 170 deals this year? We'll be somewhere above 130 and somewhere below 170 as we look at the balance of all 3 of those areas.

That's great color. And then finally, when we look at -- I don't know if you gave organic growth around veterinary clinics. But just making sure we're modeling correctly, is there any color you can give on what the revenue impact was on the Walmart closures? I know they were shut down because they weren't necessarily good stores relative to all your other businesses. But just to help to make sure that we properly allocate that in our model. I'll take that offline.

Yes, Dave, I don't know if I have that number in front of us. I think the reality of it is, is that the Walmart locations that were closed were just getting ready to anniversary to be included in the store base. But I only think we had 1 or 2 months of their sales actually included in the base. So the impact was very minor at the closing of those locations. And they were such underperforming stores, the volume was so little. So when you look at our total year last year as being a little over $8 million in sales and think about the number of locations we opened up in the back half of the year, I don't know that it would be measurable. But I'll definitely make sure that John follows up with you so your model is correct and you can give the same information to the others.

Our next question is from Bill Chappell with SunTrust Robinson Humphrey.

This is actually Grant on for Bill. Just had a quick one on the wellness center side and the rollout for this year. And I was kind of wondering on the cadence, obviously, this past year is heavily weighted to 4Q. Was wondering if that's going to be a little bit more evenly distributed throughout this year. Are there any limitation at retailers, i.e., shelf reset windows, or anything else that would maybe affect that timing?

Susan, do you want to go ahead and take that?

Bill, it's Susan -- yes, you betcha. I first want to emphasize that we've built a pipeline of well over 130 wellness centers, but we feel good about executing on the 130 across the second, third and fourth quarter of 2020. Where we land in each of those corners depends on a significant number of factors, including, number one, municipalities, permitting and really the appropriate timing for our retail partners as well, too. So we will look at the cadence out of those openings across the 3 quarters remaining in this year.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Cord Christensen for closing remarks.

Thanks, everybody, for joining us today. And obviously, thank you to all of our employees and people that helped us achieve such an excellent year in 2019 and have helped us kick off the start of 2020 in such a strong way. We appreciate all of you that joined us. We appreciate our shareholders and all the many pet parents out there that have helped PetIQ continue to drive its mission. So thank you for joining us today, and we look forward to reporting our first quarter results very soon again and meeting with all of you. Thank you.

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