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PetIQ, Inc. (PETQ) Q4 2018 Earnings Conference Call Transcript

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PetIQ, Inc.  (NASDAQ: PETQ)
Q4 2018 Earnings Conference Call
March 11, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to PetIQ Fourth Quarter and Full Year Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Katie Turner -- Investor Relation Contact Officer

Thank you. Good afternoon and thank you for joining us on PetIQ's fourth quarter 2018 earnings conference call. On the call today are Cord Christensen, Chairman and Chief Executive Officer, and John Newland, Chief Financial Officer. Susan Sholtis, President will also be available for Q&A.

Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Federal Securities Laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements.

Please refer to the Company's Annual Report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and the Company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Finally, please note on today's call, management will refer to certain non-GAAP financial measures, including adjusted gross profit, adjusted G&A, adjusted net income and adjusted EBITDA among others. While the Company believes these non-GAAP financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. In addition, PetIQ has posted a fourth quarter 2018 supplemental presentation on our website for reference.

Now, I'd like to turn the call over to Cord Christensen, Chairman and Chief Executive Officer.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

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

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

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

Adjusted EBITDA for the fourth quarter was $6.5 million and $41.5 million for the full year. Both results were in line with our expectations. Our team did an excellent job to further capitalize on opportunities to grow with our animal health partners and generate incremental sales of distributed products similar to Q2 and Q3. This resulted in an anticipated shift of our product sales mix in the quarter, but had no effect on our gross margin dollars. We also experienced the benefit of our scalable infrastructure with a solid leverage of our G&A expenses that helped to fuel profit growth.

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

During the year, we worked diligently to execute on our Follow the Pets strategy by further enhancing our core pet health and wellness capabilities. In addition to integrating VIP, we made key leadership team additions and the tuck-in acquisition of HBH, an innovative developer and manufacturer of specialty pet supplements and treats. These actions further strengthened PetIQ's overall market position in animal health and wellness.

We also expanded our business with new and existing partnerships across all sales channels through complementary veterinarian product and service offerings.

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

John will provide our specific 2019 outlook in his remarks, but first, I will provide some additional color on our business, and the sources of future growth. For the fourth quarter, our flea and tick business performed well and outpaced category growth. According to Nielsen measured channel data through December 31, the flea and tick category was down 10.7%. PetIQ's results outpaced this result in the Nielsen measured channels over the same period.

Our brands performed better than the overall market. Non-measured channels were up meaningfully and our prescription drug flea and tick was up significantly and in line with the macro trends in the broader veterinarian market. Keep in mind, for PetIQ, only 28% of our Q4 sales were in Nielsen measured sales channels, the 72% of our sales that were in unmeasured sales channels dramatically outpaced the measured flea and tick sales channels, particularly in the e-commerce and Rx sales channels.

We continue to generate solid increases in both SKU velocity and distribution, with our business spanning over 700 plus items, seven different categories and consisting of one of the most diversified customer bases in the industry. We believe PetIQ is well positioned for future growth and success.

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

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

For the fourth quarter, e-commerce generated the highest channel growth rate for the eighth consecutive quarter, growing at a much faster rate than the overall Company growth rate. In addition, our pet RX product rollout to an existing e-commerce partner in Q3 generated incremental growth in Q4. We have been very pleased with the initial results of this pet RX rollout and believe this further reinforces our optimism for this category over time.

Our prescription drug program also performed well, producing the highest growth rate among all our product categories. In addition to our pharmacy selling more pet prescriptions in total, our own veterinarians and clinics rolled over 1.1 million prescriptions in 2018. Industry Innovation is also helping to fuel pet RX script growth as a significant number of pet parents opting to use chewable prescription flea and tick products, instead of OTC options.

PetIQ is a trusted partner for both brick-and-mortar and click-and-pick go-to-market strategies with a strong run rate for future growth across all sales channels.

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

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

Since opening our initial 20 VetIQ wellness centers during the first six months of 2018, we have been carefully measuring our progress and analyzing our operating model to best optimize our returns on those capital investments. Our President, Susan Sholtis, has been at the center of this work and as a result, we have quantified our key learnings and are now leveraging them nationally.

First, optimizing hours of operation. Upon the initial opening, we sought to better understand the optimal hours of service, for example, by location, what days of the week, and what times of day are most frequently utilized by pet parents. This was important learning from a labor optimization perspective.

We now know that we can still service the vast majority of customers, but in a five-day, 40-hour workweek. This allows us to establish a presence with customers and then add hours and days, as the volume requires, while minimizing expense and achieving similar contribution margins to the 30% that our prototype model suggests, as we hit our mature run rate in 18 months.

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

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

Third, real estate selection. Our operating team has extensive experience in real estate execution from decades spent in retail, working on similar projects. So we have a deep appreciation for the power of proper site selection. The initial locations were cast across a variety of demographic and regional makeups to allow us a diversified sample to learn from. These learnings have made it very clear to us the selection criteria required for a successful wellness clinic.

For example, we know the population base and household income, while important, are not the only drivers of successful site selection. Pet population and very basic pet care spending are also important. In addition, veterinarian recruiting is much more successful in urban versus remote geographies.

Finally, we have learned that our wellness centers perform better in less rural environments and in ZIP codes with higher pet spending rates. We're also making the veterinarian operating the clinic a key component of our decision. Our team is now utilizing these core tenants and our real estate discussions with our retail partners across the country to best position us for success as we begin to accelerate our veterinarian service rollout in 2019.

We currently have commitments for an additional 80 plus wellness center locations during 2019, with new wellness center openings in Q2, Q3 and Q4. We expect the majority of these openings to be weighted to the second half of the year. We are very pleased that our veterinarian service model resonates across retail partners with a little over half of our openings expected in the mass channel and the balance of the new wellness clinic openings in both new and existing retail partners.

We have made great progress internally in our integration of VIP and today have a development team in place that is pushing our Follow the Pets growth initiative. We are creating alignment on site selection and other certain criteria to further build our development pipeline for the coming years. The great news is that, we have a high level engagement from both new and existing retail partners, fueling our continued excitement for future growth.

As we move forward, we continue to believe that we are in the early stages of achieving our potential. Through our Follow the Pets long-term plan, our team will continue to strategically execute on disciplined operational initiatives and investments to support PetIQ's long-term sustainable growth as the pace of pet humanization continues to increase.

As we have highlighted before, approximately 86% of pet owners purchase their pets food at our retail partners and pet households are at its highest levels ever, driven by millennials, which are now the largest generational segment of pet parents. We believe these favorable industry dynamics support our stated plan to open at least 1,000 veterinarian health and wellness centers by the end of 2023, with our retail partners.

We will follow these pets and pet owners by bringing affordable veterinarian services and products to where they are already shopping for their pets' needs. We are uniquely positioned to take advantage of the macro trends that are happening in the pet industry, whether -- 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 all depend on better healthcare.

The demand for a more affordable and accessible pet products and veterinarian services is strong and we remain committed to expanding our category leadership position to fuel our future growth and value for our shareholders.

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

John Newland -- Chief Financial Officer and Corporate Secretary

Thank you, Cord. We are pleased with our financial results. Our convenient and affordable offerings continue to fuel strong customer and consumer relationships, resulting in an accelerated rate of growth. Fourth quarter 2018, consolidated net sales were $111 million, an increase of $59.1 million or a 114% over the fourth quarter of 2017.

Our strong sales continue to be driven primarily by growth in existing accounts, with distributed products and new customers. VIP revenue contribution in the Services segment makes up the remaining balance of the reported year-over-year growth in the fourth quarter. Product segment net sales for the fourth quarter were $95.1 million, an increase of 83% year-over-year.

On an organic basis, we experienced growth of 70% during the quarter. Segment operating income was $9.6 million, an increase of 75% compared to fourth quarter last year. We continue to have excellent traction in our distributed business and are focusing our efforts on increasing the penetration of existing accounts with additional SKUs, as well as establishing new customer relationships.

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

Fourth quarter 2018, gross profit was $16.9 million on a GAAP basis or 15.2% as a percentage of net sales, compared to $10.5 million or 20.3% as a percentage of net sales in the same period last year. Adjusted gross profit was $19.7 million and adjusted gross margin for the quarter was 17.7%. As I mentioned, gross margin was impacted by an ongoing shift toward distributed product, but gross profit dollars were consistent with our expectation.

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

This is another demonstration to the degree to which we are leveraging our fixed overhead and increasing our utilization rate, a trend we think should continue for many years to come. We will continue to strategically make disciplined investments in our business to support our future product and services growth. Importantly, our legacy service platform has reached an inflection point as it relates to G&A and as that business builds from here, we'd expect similar leverage to those fixed costs as well, making for improved operating profits into the future.

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

Turning now to the balance sheet. Before we touch on debt and liquidity, here are a couple quick comments on working capital. We saw a decrease in accounts receivable of $8.6 million compared to prior year quarter. This is in line with our seasonal sales mix, largely driven by flea and tick product. Inventory increased $16 million to $92 million. This increase is the result of inventory needed to support the growth in our business and December inventory purchases tied to a shift in timing from customer shipment to the first quarter of 2019 from the second quarter of 2018.

We are maintaining inventory levels in line with our sales needs. Our liquidity continues to be in great position to address our future growth. As a reminder, during the fourth quarter, the Company completed an underwritten offering of 2 million shares of primary Class A common stock for a total net proceeds of approximately $73.9 million.

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

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

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

We've experienced a significant mix shift toward branded distributed product due to our alignment with our animal health manufacturing partners, we do expect this dynamic to moderate in 2019 and are forecasting an adjusted gross margin percent to be approximately flat versus 2018. From a G&A perspective, we expect to continue to generate leverage.

As Cord mentioned, we expect to open more than 80 new wellness centers in 2019, beginning in Q2, with the vast majority of wellness centers opening weighted toward the second half of 2019.

In closing, we are very pleased with our full year and fourth quarter results and remain excited about our future growth prospects.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jon Andersen with William Blair. Please proceed with your question.

Jon Anderson -- William Blair -- Analyst

Yeah, thanks. Good afternoon, everybody.

John Newland -- Chief Financial Officer and Corporate Secretary

Hey, Jon.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Good afternoon, Jon.

Jon Anderson -- William Blair -- Analyst

I wanted to ask about the 2019 guidance to begin with. Could you talk a little bit more about your expectations around the cadence of the year, 14% plus growth on the topline and leverage on the bottom line. Is the -- on a full year basis, obviously it's another strong outlook, but I just want to make sure I understand any kind of puts and takes as you move through the year, particularly with the -- some of the timing of the flea and tick season in '18? And then the timing of the new clinic openings in 2019? Thanks.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Thanks for the question, Jon. Obviously, we had an extremely strong 2018 year, with record growth and that growth came from a lot of different areas, but part of it was our ability to consolidate a ton of the business, which causes to have significantly higher growth rate than what we've messaged for 2016.

However, our 2019 -- however, we're extremely excited because the momentum we see in Q4 and the fact that our business is still diversified and isn't just about flea and tick anymore, we can get a sense and feel for how we're going to go into the new year, and how we're going to perform, and I've already seen very exciting results already flowing through the business year-to-date and in our performance thus far.

We have a message that our sales will be approximately $600 million or greater, and which takes into account our belief that we have lots of things continuing to flow and grow with the business this next year, which is very exciting for the Company to see the topline continue to have that type of growth.

We also know that the business as we saw this last year that had guidance of $450 to $500 million, and we continue to update it as we saw acceleration. And we believe that still exists in the business, but we'll have to hope and see how flows through and see how the year comes out, but we do know that those same things that cause us to be so far above the top end of the sales this year absolutely still in place and we could see acceleration as this flows through the business from that.

From a G&A perspective, as you get time to study what we've put out there, and you get time to study the EBITDA contribution. We're estimating EBITDA to increase 60 basis points to 8.5% from the 7.9% we finished in 2018. And that's a direct reflection of the continued leverage we're seeing in the business and it really comes from two parts.

We can absolutely see significant leverage coming to the product business. That business has gotten to the size that it is -- and in John's communication that just the pure crazy amount of increase we saw in the topline, with such little increases in our G&A to support it. But we really are at an inflection point in our services business as well.

So for every dollar of revenue, we'll start to see that flow through. So even though, we've made investments in G&A this year, and we've brought in HBH with their G&A, we still see operating leverage that we believe to see expanded EBITDA margin, which is a direct reflection of that G&A leverage even though our margins are relatively stable for 2019.

Does that help with your question, Jon? Is there another part you want to cover?

Jon Anderson -- William Blair -- Analyst

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

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Yeah. So I think obviously we do get to have the first half of the year with that new opportunity now having two more quarters that we're not anniversarying that from the first year, which will be a nice contribution to the year. However, we've always talked about the fact that the industry in total is growing at a CAGR that is in that kind of 6% to 7% type range. And we've always done better than that in total.

So the product business we believe on an organic basis will be a greater growth rate than the service business this year. When you exclude new clinic openings, we'll be at low double-digit growth rate on our community and mobile clinic business this year, which when we message it will be up in that kind of 14% range in total. You can see that the product business is going to have an organic growth rate better than that for the year. So we're excited about -- we don't have a lot of new store or door distribution win this year.

We're obviously -- have such a significant customer base out there that what you see flow through is very organic in nature to the business and then we're excited to see it flowing through already in this first quarter.

Jon Anderson -- William Blair -- Analyst

Great. Just one more for me on the service business. Thanks for the color around some of the learning, you talked hours of operation, some of the marketing efforts real estate strategy. Could you talk a little bit more about what you're seeing in those initial 2020 some odd locations? Are you seeing the pet counts ramp in line with expectations. Do you still think that a unit economics in and around $600,000 of revenue per clinic is the right way to think about this after 18 months or maturity?

And then is there anything else that you think you need to do here or maybe early on in the rollout to just ensure that you're building kind of awareness levels and the traffic in those locations? Yeah, I'll leave it at that. Thanks.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

I'll take the first part of that and I'll let Susan take the last part around the awareness and what we're doing to build it. Obviously, when we started on our mission to expand our wellness program significantly, we had a bunch of things we wanted to learn from it. I think the first thing we need to know is that, we already had a number of wellness centers operating in the business that were delivering the results after 18 months that we communicated where we were up in that 600,000 plus type numbers, delivering those 30% or 35% contribution margins and 25% EBITDA margins.

We had no history operating in a significant mass retailer with those type of stores or those type of customer accounts and the initial site selection really intended to let us find out if just a store of that size, we have many people around the center could work anywhere, and that it could support really any size of operation with that type of customer base and obviously what we've messaged, we've learned it.

First and foremost, you still need to be disciplined about your site selection process to make sure that there's not just people there, but there's people there that want to take care of their pets, they spend money on their pets. There's veterinarians -- veterinarians that we can count on to be stable and build that relationship that continues to build loyalty in the store.

And these are number of learnings around just a number of hours of operation. Our stores that are doing up in the 600,000 plus range and delivering those results, they only open 40 hours a week or less and typically have one veterinarian, a few technicians. Our initial stores we opened up for 60 hours, 70 hours a week and had two veterinarians, a lot more labor and cost.

And what we're learning is, you can't be more conservative with the operation and grow into the size of operation, that necessitates more labor to support the business. So what we've clearly learned is, number one, we need to select stores that meet the right criteria, we need to be more diligent about doing what we know is right and how we select stores.

There's plenty of opportunities out there. Our numbers are not at risk to achieve our long-term stated objectives by choosing stores that meet the criteria. And second, we need to be sure that we're optimizing our P&Ls and running our business in a way that is just smart for taking care of how we're going to operate and run the business.

Of the first 20 locations, when we go back and apply the metrics of what and how we choose sites, it's no surprise that the locations that meet our criteria are performing and growing. And the sites that don't meet our criteria, although they're growing, they're not growing at the pace, we'd like them to grow and it's going to take longer. So we're definitely excited to see that, we don't think we're wrong, but there's plenty of opportunity for expansion. And ultimately, when we run a more conservative P&L, we can get to 20% plus EBITDA contribution margins. That volumes that can go all the way down to $400,000 a year in sales, but still very optimistic that the right size of these can be well up in about $600,000 of range and the kind of contribution that we've talked about. Now, I'll let Susan address your marketing and things like that.

Susan Sholtis -- President

Yeah. Good afternoon. I'll just add couple of comments completely. Court emphasized obviously the importance of geographic and demographic information and us choosing the wellness centers. But it's also not just those, it's also making sure that we've got a good understanding of our marketing levers as well too. We do have an agency of record that we've hired. That agency has extensive experience not only within the retail environment, but they also have experience in animal health over 25 years worth.

So they understand the category very well. They jump right in and we are in a strong partnership with them and with our marketing team. We've focused and we have a geo-targeted campaign around our 34 wellness centers because our objective is to understand what levers we need to pull in order to be able to drive that pet traffic. We are singularly focused on that on that on that individual piece.

I think I would say also that it's early. When you go back to last year, some of these centers basically opened later in the year. So when you look at fourth quarter and first quarter of this year, those tend to be the slowest times for veterinary services. And literally we're going out the door now with our marketing campaigns starting in February. So we still have a lot to learn from those marketing campaigns and understanding how we can drive traffic even in some of those more rural areas.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

We're very optimistic as we've seen those campaigns launch and already seeing our overall pet counts up already 21% just in the month of February by using our first program. So yeah, we're so very excited and obviously very excited about the next round of locations we're building, Jon.

Jon Anderson -- William Blair -- Analyst

Great. Thanks a lot for all the color.

Operator

Our next question comes from the line of Brian Nagel with Oppenheimer and Company. Please proceed with your question.

Brian Nagel -- Oppenheimer and Co. -- Analyst

Hi, good afternoon. Thanks for taking my question.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Thanks, Brian.

Brian Nagel -- Oppenheimer and Co. -- Analyst

So my first question, I guess, most on the guidance. So you laid out guidance next year for -- at least just over 14% sales growth. So the question I have there is, first off, is that -- is the 14% is that consistent with the longer term targets or is there a -- should we think about there being some factors that are unique to 2019 to keep them off that linear trajectory to the longer-term sales guidance?

And then second question is that, and maybe a follow-up compared to the one previously, but as we think about what's going to contribute most to that sales growth, could you give us a better parameters between say the distributor business and the service businesses within that growth rate?

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Yeah, I think we can. Thanks for the question, Brian. Our long-term stated growth rate is to maintain a 15% topline growth rate. We've always had greater than 15% growth rate, but we've never given guidance on -- growth, so we didn't have 100% visibility of what was in the plan, and how the business was executing and we've definitely given you guidance in line with that visibility.

However, our visibility to last year had us finishing between $450 million and $500 million and had plenty of things accelerate that were not visible at that point. And then, this is a space, where there's $10 billion of product and $20 billion of services, and I think we're extremely well positioned to receive anything that comes through the space, and in a way that gives us room to do better than that just like we did this year.

But there's no doubt that there is a base that's gotten much larger, and definitely the visibility we have that we've applied to it let's us feel great about being able to go from $528 million we did this past year to something better than $600 million and I think in line with where we felt we had visibility to, but plenty of room for us to do better than that as we go out and execute on our plans.

The best part about our business was seven different things that contribute revenue and all of them growing. We do get growth from everything at this point, Brian. Our service business even down to our mobile community clinics, everything is growing in a positive direction for the Company. And there are things like our prescription drug program, which is predominantly distributed that is outpacing things as we've messaged, it's been our most exciting category from an overall growth perspective.

But I think, we're well positioned to grow in all categories very significantly as a business and feel great about our customer relationships, feel great about our partnerships in every aspect of our business and fully anticipate that we're going to have another great year growing our business as we continue to focus on giving people access to affordable pet care for their pets.

Brian Nagel -- Oppenheimer and Co. -- Analyst

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

McCord Christensen -- Chief Executive Officer and Chairman of the Board

I think it's a couple of things, that's definitely part of it. I think the reality of it is by the time we announced that we were going to expand and get to work and get our team organized, and then the pace at which our retail partners could work with us, we've been working diligently. We're ready to do more than that. We feel great that the things that are important to us on a criteria standpoint, puts us on pace to be at that 80 plus number. Of those 80 plus numbers, 75% of them are contracted at this point. The other 25% were in review stage with it, but are so close that we feel confident telling the market we're going to be better than 80 locations this year. So it's that, but it's definitely applying the metrics, applying the disciplines in how we're selecting sites.

But the number of factors is getting all of our retail partners to keep up with us at the pace that we're ready to work at. And I think we feel great about our plans for the locations, we're going to build, where we're going to build them, where we're going to see some store clustering, that we haven't had in the past that gives us the opportunity to be even more focused and how we're going to go to market and I think we have another great round of locations with a -- significant amount of learning still as we push forward this mission of being able to build a thousand clinics over the next five years.

Brian Nagel -- Oppenheimer and Co. -- Analyst

Perfect, thank you.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Welcome.

Operator

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

Joe Altobello -- Raymond James -- Analyst

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

Susan Sholtis -- President

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

McCord Christensen -- Chief Executive Officer and Chairman of the Board

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

Joe Altobello -- Raymond James -- Analyst

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

McCord Christensen -- Chief Executive Officer and Chairman of the Board

So, I think it's a lot of things, but ultimately 2018 was the first year of it. All of the major manufacturers actually participated in the process for selling into the space. And if you think about it, a category that has $10 billion of products in the veterinarian market and really everybody pushing at the same time to drive business. We had no idea what that was going to mean to the business. And so we saw a significant amount of acceleration in script counts that were filled through our pharmacies as that accelerated.

We saw better marketing plans on their brands in both prescription and over the counter. And that mix is something that we welcomed as our sales went out the top end of the range and we saw that happen. We're able now to participate in their R&D and their new item launches in a way that we never had before. And so I think, the reality of it is, it's a $10 billion product category, and we're a $450 million player in that $10 billion and we believe with that kind of a share, we can have tons of room to grow the total business and although we would love to continue to have a good mix of what grows out there, we view all business, that is helping consumers get better pet healthcare for their pets or the better products they're buying is good business for us, Joe.

And the leverage we're seeing on the product side, we shouldn't be afraid of any growth in any part of the business that we have on our part of the business.

Joe Altobello -- Raymond James -- Analyst

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

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Say, what?

Joe Altobello -- Raymond James -- Analyst

Why do you think that shift back a little bit toward manufacturer this year?

McCord Christensen -- Chief Executive Officer and Chairman of the Board

I think there's a few things. I mean obviously when we acquired HBH, an integrator, it gave us a platform that we think we can accelerate growth with items there as we get into a cleaner structure for how we're taking the product out of that plant to market. I think secondly, we've emphasized that part of our business needs some more attention.

And we had a really that first year of all the manufacturers and when you have that much attention given to one thing, we lost some balance to that focus. And so I think we just make sure we went the planning process that we're not going to lose attention to anything, but we're definitely letting people know where we didn't have as much emphasis or supervision to getting some of the business done that we should have gotten done in the past. And then, obviously, cleaned up the structure a little bit on some of it. So I think you'll see that -- we'll see some acceleration there.

Joe Altobello -- Raymond James -- Analyst

Got it. Okay. Thank you guys.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Thanks, Joe.

Operator

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

Unidentified Participant -- -- Analyst

Hi, this actually (inaudible) on off for Bill. Thanks for taking the question. Just a follow-up on the manufactured growth this year. Is there any reason or plan to maybe accelerate some marketing programs or some more investment in that part of the business going forward?

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Look, we have the right plans, I think in place all along. I think we have, as I said earlier, just made sure as we build our plan, we go to the market, we do it at the item level and at the customer level and we have our hands full as we took a business from 267 million to 530 million. We obviously see another $75 million, $100 million of opportunity growth this year.

A little more digestible to all that we took on last year. We also took on growing from 200-plus employees to over 3,000 in a single year as well. So I think we're in a good place where we've been able to make sure every aspect of our business has been planned both at the item and the customer level with the right amount of marketing balance tied to the actual results that will come through the business.

So I think, in general, we had a transformative year. We had two acquisitions. We more than doubled the business. We had literally a 1,000% increase in our employee base for the year and we're at a place where we've done that well, we've integrated and we're stabilized. We have an opportunity to get everybody in a place where they know where to go work on, and we're excited about what we think that'll translate into that part of the business.

Unidentified Participant -- -- Analyst

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

Susan Sholtis -- President

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

Unidentified Participant -- -- Analyst

Got it. Thank you very much.

Operator

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

Kevin Grundy -- Jefferies -- Analyst

Thanks. Good afternoon everyone.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Good afternoon, Kevin.

Kevin Grundy -- Jefferies -- Analyst

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

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Yeah, Kevin, I think part of the -- tough part of that a year, you acquire a business and you bring in that business.

We write out of the gate message that we had some restructuring that had us optimize schedules, which included us, reducing frequency to keep in a store in there. We had other stores, we eliminated completely that we no longer service because they run profitable. And I think as you think through that restructuring, it became very difficult to get your clean data points on how'd you look at same-store sales from a true kind of comp basis.

So when we look at kind of all those things normalized out, we ran store comps, I think we're around 8% year-over-year in our service segment. And we view that it was a absolutely very successful year for us in many ways in the sense that we integrated the people. We got a good base and culture in place for how we budget and measure success. We brought those metrics out to the 34 regional offices that we have across the country, which has led to better decision making, which flowed through in better profitability for the Company.

And as we said before, it is such a tipping point in that business, because now that we've stabilized that, the incremental growth has for the first time ever significant leverage into the business from there. So our community clinics that have basically been very flat on the growth, we're seeing low double-digit growth in those locations year-over-year.

A lot of it driven by just increased pet counts. And then, when you think about the fact that we ran 74,000 clinics last year, if we see one more pet, that's 74,000 more pets that we'll see when your average ticket is just under $100. It's a significant amount of new revenue at very, very high margins and no incremental cost to support them. So it's a much better story than it sounds on the surface.

And I think, we're in a place where as you think about the wellness centers expanding and maturing and getting to where we have those contribution, it's just a hockey stick in the future. So we're actually very excited about the way the year finished and extremely excited as we're seeing the expanded contribution coming through our budgets for 2019.

Kevin Grundy -- Jefferies -- Analyst

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

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Yeah, I mean the answer is yes and yes, Kevin.

Kevin Grundy -- Jefferies -- Analyst

Great.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

We're feeling very good about that, that business growing. And then again we're feeling very good about kind of our low double digits on the service side. And I think, you apply that math, (inaudible) line with us getting to that approximately $600 million or better?

Kevin Grundy -- Jefferies -- Analyst

Okay. Very good. Thank you. Congrats on a great year.

McCord Christensen -- Chief Executive Officer and Chairman of the Board

Hey, thanks, Kevin.

Operator

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

McCord Christensen -- Chief Executive Officer and Chairman of the Board

We're obviously very excited to have (ph) PetIQ for all the success we had in 2018. It was a transformative year for the Company. And although there's a lot of excitement about talking about what the future holds and is bringing and the exciting new things that we're doing here at PetIQ, which we are still extremely excited about our base that Company that did $528 million in sales and had one of the most record years. We could ever hope for the Company, and we saw that build throughout every quarter, throughout the year. So, we are excited to continue to see that momentum, as we know pet owners are desperately looking for ways to find pet healthcare in locations that are more convenient, more cost effective.

And we feel strong, that PetIQ is at the bull's eye of providing people access to that and as we continue to execute and do that, we feel very strongly that we will do nothing, but continue to grow, drive leverage into the business, which will increase profitability and really have everybody that's in the value chain, whether it's our retail partners our customers that are doing business with us, their pet getting healthcare and are ultimately our shareholders they're going to participate as we continue to successfully grow the business.

So we thank all of our employees, all of our partners, all of our customers and anyone else out there that helped us have such a successful 2018 and we look forward to having an equally successful 2019 and look forward to being back talking to all of you as we finish up Q1 and report our results from that quarter. Thanks again everybody and everybody, have a great day -- evening. Thank you.

Operator

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

Duration: 52 minutes

Call participants:

Katie Turner -- Investor Relation Contact Officer

McCord Christensen -- Chief Executive Officer and Chairman of the Board

John Newland -- Chief Financial Officer and Corporate Secretary

Jon Anderson -- William Blair -- Analyst

Susan Sholtis -- President

Brian Nagel -- Oppenheimer and Co. -- Analyst

Joe Altobello -- Raymond James -- Analyst

Unidentified Participant -- Analyst

Kevin Grundy -- Jefferies -- Analyst

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