Mar 17, 2018
Executives
Katie Turner - ICR, IR McCord Christensen - Chairman & CEO John Newland - CFO
Analysts
Brian Nagel - Oppenheimer
Operator
Greetings and welcome to the PetIQ Fourth Quarter and Full Year 2017 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to Katie Turner for opening remarks.
Katie Turner
Thank you, good afternoon and welcome to PetIQ's fourth quarter and full year 2017 earnings conference call and webcast. On today's call are McCord Christensen, Chairman and Chief Executive Officer; and John Newland, Chief Financial Officer.
Before I begin, please remember that during the course of the 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 involves risks and uncertainties that could differ materially from actual results and events than those described in these forward-looking statements.
Please refer to the Company's perspective filed 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 forward-looking statements made today. Finally, please note on today's call management will refer to certain non-GAAP financial measures.
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 press release for a reconciliation of a non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.
Management will also refer to net income and adjusted net income, as well as EBITDA and adjusted EBITDA on today's call. For calculation of these measures, please refer to the Company's press release.
Now I'd like to turn the call over to Cord Christensen, Chairman and Chief Executive Officer.
McCord Christensen
Thank you, Katie. Good afternoon, everyone and thanks for joining us today.
I will provide a brief overview of our business highlights and recent performance. John Newland, our CFO; will then discuss our fourth quarter financial results in more detail and our outlook for 2018.
I will follow-up to discuss our strategic growth initiatives and long-term view of our business. Finally, John and I will open the call to answer your questions.
At PetIQ, we remain committed to our mission to make pet lives better by education pet parents on the importance of regular veterinarian care and veterinarian recommended pet products. This mission continues to allow PetIQ to deliver significant results quarter-after-quarter and year-over-year.
We are very pleased with our finish to 2017. The strong execution of our strategic growth initiatives drove record annual net sales and profitability.
For the year, net sales grew 33% to approximately $267 million. Our gross profit margin increased 290 basis points to 19.2% and adjusted EBITDA increased $11.7 million or 110% to $22.3 million compared to 2016.
2017 was a year of significant corporate milestones for PetIQ. In addition to our record financial results, we successfully completed our initial public offering and identified the highly complementary strategic acquisition of VIP Petcare which we completed in January of 2018.
Our goal of increasing pet health and wellness by improving awareness, choice, accessibility and convenience of veterinarian grade pet products and services increasingly resonates with new and existing customers. In 2017 we generated strong growth across all sales channels and customers we serve, this include mass, food and drug, club, pet specialty and e-commerce.
For e-commerce we had a much smaller contribution to total net sales but a strong 300% plus growth. The evolution of e-commerce continue to be a compelling growth opportunity for us and we intend to be a trusted and valued partner to our customers that are pursuing a variety of go-to-market strategies to accommodate today's consumer shopping habits.
Pet parents increasingly have greater opportunities to find their veterinarian grade medications, as well as their over-the-counter flea and tick preventives wherever or whenever they want them. We believe our category leadership, broad product portfolio and compelling service offerings, value proposition and strong customer relationships will continue to fuel our future growth.
From our perspective it is clear the challenge with PetIQ is not where to find growth but the path we will choose to pursue to achieve it. PetIQ is well positioned to take advantage of the macro trends that are happening in the pet industry where there is rising pet ownership, pet humanization, and increased aging of pets that all depend on better healthcare.
The theme that PetIQ has created a differentiated business model solely focused on the importance of offering regular convenient access and affordable choice for pet preventive and wellness veterinarian products and services which provides us with numerous opportunities to drive growth and returns for our shareholders. With that brief overview, I would like to turn the call over to John.
John Newland
Thank you, Cord. I will now review our fourth quarter financial summary.
Net sales increased 15.6% to $51.9 million for the fourth quarter of 2017 compared to $44.9 million for the same period in the prior year. This increase is significant when you consider the anniversary of our major expansion into Pet Specialty in the fourth quarter of 2016.
We continues to see significant growth as a result of the execution of our four growth initiatives which were; growing consumer awareness of our products in the retail channel, deliver innovation in pet health at a great consumer value, expand strong partnerships with our leading retailers and pharmacies, and finally, increase the number of products with existing retailers. Gross profit was $10.5 million, or 20.3% as a percentage of net sales compared to $7.6 million, or 17% as a percentage of net sales in the same period last year.
The gross margin expansion of 330 basis points versus the prior year period was primarily due to the growth in net sales which created improved economies of scale, as well as continuous improvements we're realizing in the procurement and some new and refreshed products in some of our high margin category. General and administrative expenses were $10.5 million compared to $7.5 million in the prior year period.
This includes $2 million of expense related to our acquisition of VIP Petcare which closed on January 17. Excluding these onetime expenses, adjusted G&A as a percentage of net sales decreased approximately 40 basis points for the fourth quarter of 2017 compared to 16.8% in the fourth quarter of 2016.
Adjusted net income increased by $3.8 million to $2.6 million for the fourth quarter of 2017 which compares to an adjusted net loss of $1 million in the prior year period. Net loss was $3.4 million for the fourth quarter of 2017 compared to a net loss of $1.2 million for the prior year period.
Adjusted net income excludes onetime non-cash expense of $3.4 million or $0.16 per diluted share associated with the revaluation of deferred tax asset, as well as the provisional tax expense of $0.2 million associated with the deemed repatriation of foreign earnings. $2 million associated with the transaction costs associated with the Company's acquisition of VIP Petcare, $0.2 million of stock-based compensation expense, and public company cost of $0.4 million.
Adjusted EBITDA grew by 132% or $2 million to $3.6 million for the fourth quarter of 2017. From a margin perspective, adjusted EBITDA doubled year-over-year to a rate of 6.8% in the fourth quarter.
Turning now to the balance sheet. At the end of fourth quarter, the Company had cash and cash equivalents of $37.9 million, and an outstanding balance on a revolving credit facility of $15.3 million.
The increase in cash versus the prior year period is primarily due to the receipt of $45.9 million and net proceeds associated with the Company's IPO which closed on July 26, 2017. The reduction of debt is due to cash generated by operations used to pay down debt offset by increases in working capital.
Before Cord wraps up with our prepared remarks, I'd like to shed some light on the new revenue recognition accounting standards that we'll be adopting in the first quarter of 2018, offer some additional perspective on our corporate structure and influence of taxes, and then of course share some thoughts on our 2018 outlook and plans for additional disclosures in the coming month. In the first quarter of 2018, we will be adopting the new revenue recognition standard, ASC606 using the modified retrospective adoption method.
As a result, the cumulative effect of adopting this guidance will be an adjustment to accumulated debt of approximately $0.3 million on January 1, 2018 which will have no effect on the 2017 results. Prior periods will not be restated.
We expect the implementation of the standard to result in acceleration of certain trade programs, allowance accruals and other forms of variable consideration, thus reducing net sales in the first and second quarter of 2018 with a corresponding increase in third and fourth quarters relative to past practice. Additionally, the Company will classify certain costs associated with the display of product as cost of goods sold at the point in time transfer of control to the customer occurred.
Previously, the customer had accounted for these costs as merchandising expenses in the period in which displays are utilized. To summarize, this will have a modest effect on our income statement.
You will see some shifting of dollars from G&A to cost of goods sold which will translate to a slightly lower gross margin along with some settled timing shifts when sales dollars are recognized. Shifting to our corporate structure and some tax related matters.
The Company utilized an upset organizational structure during it's IPO which created the dual-class share structure that we have today. This is comprised of the Company's public Class A shareholders who hold stock in the publicly traded PetIQ entity, then turn those interests in the partnership in which our pre-IPO shareholders directly hold their interest along with their Class B shares of common stock.
The Class B shareholders are treated as a non-controlling interest for reporting purposes and receive an income allocation that pay taxes on. What's unique in the way PetIQ has structured it's organization though is that the ownership group did not establish a tax receivable agreement for TRA.
In practice, it's actually more common to include these TRAs among companies utilizing similar structures. By forgoing a TRA, the public company and thus Class A public shareholders receive the entire tax benefit associated with the deferred tax asset revaluation that the FC structure generated and will continue to generate as Class B shareholders convert to Class A shareholders.
We think that this is an important value-added nuance to our public shareholders given the positive cash flow impact to the Company. The Company was impacted by tax reform passed in 2017 as previously discussed.
The Company expects to shift to a cash tax payer as earnings increase in 2018 and beyond and this will benefit from the lower tax rate going forward. As we look ahead, we expect to realize the new 25% statutory tax rate in 2018 and beyond excluding the impact of the non-controlling interest which reflects the decrease in the statutory rate as a result of the recent tax legislation that was passed.
The tax rate will not reflect cash savings generated by the FC structure and our lack of TRA. However, those savings are significant and will allow the Company to put those cash dollars to use growing the business.
Now onto our 2018 outlook. PetIQ is reiterating it's full year 2018 expectations that we originally shared in conjunction with the announcement of the VIP acquisitions in early January.
Specifically, we are forecasting full year 2018 consolidated net sales in the range of $450 million to $500 million which represents an increase of 69% to 87% year-over-year. We are also forecasting 2018 adjusted EBITDA in the range of $40 million to $45 million, an increase of 79% to 102% year-over-year.
The VIP acquisition will significantly diversify PetIQ's current net sales mix with the combined veterinarian products business representing approximately 75% of net sales in the services business representing approximately 25% of net sales based off the core mentioned expected net sales forecast for 2018. We also continue to expect incremental annual interest expense of $5.7 million associated with the financing of the transaction.
Again, we expect to realize a 25% statutory tax rate which reflects the decrease in the rate as a result of the recent tax legislation that was passed. To assist with modeling and the Company's new subsidiary, PetIQ will be provided historically financial statements for the acquired VIP Petcare business, as well as pro forma financials for the combined company.
The preparation process is ongoing and we expect [indiscernible] complete within the allotted 75 day window following the close of the transaction. Therefore, you can expect an additional filing in the first week of April that contains this information.
Please note, we also plan to host a conference call and webcast with details to follow in the next few weeks to review the information with everyone. In conjunction with this work, we are evaluating our operating segment to align with our new more diversified business in an attempt to further improve transparency and healthy investment community better understand and measure the drivers of each of the businesses.
Given the transaction close during the first quarter, we expect us to be part of our first quarter 10-Q filings and related earnings release. This concludes our financial overview.
I will now turn the call back to Cord for our closing remarks. Cord?
McCord Christensen
Thanks, John. As we kick-off 2018, we are undoubtedly a much larger and more diversified pet health and wellness company with the addition of VIP.
And we look forward to demonstrating the strategic value of our recently combined veterinarian products and services platform. As a quick reminder, or for anyone new to PetIQ, VIP is a leading provider or veterinarian and wellness in pet preventive services, as well as a distributor for pet wellness products and medications.
VIP provides a comprehensive suite of services at it's community clinics and wellness centers that are managed through it's 29 regional offices and hosted at local retailers across 31 states. Their services include a full suite of health and wellness services and products to include diagnostic tests, vaccinations, prescription medication, micro-chipping and wellness checks.
In 2017, VIP served approximately 1 million pets at clinics. VIP's veterinarian services and products allowing PetIQ's corporate strategy and mission to improve pet health by providing consumers convenient access and affordable choice to a broad portfolio of pet health and wellness solutions.
We believe we have callus opportunities to leverage each others relationships and we believe this will drive shareholder value over the long-term. Today, we are really excited to have the opportunity to also announce our first strategic step in the growth of our combined companies.
We have signed definitive agreements with Walmart to open 20 veterinarian clinics. The first 2 locations will open next with all 20 locations opening over the next 90 days.
I'm incredibly proud of our team who in a very short period of time has been able to leverage our cross-functional capabilities and fuel the expansion of our first PetIQ Petcare clinics. As many of you know, Walmart has been a valued partner of PetIQ's over the last several years with our veterinarian recommended pet products and they have consistently been supportive of innovative ways to help grow their pet health and wellness category offering.
We believe this new and incremental veterinarian service partnership further strengthens our relationship. In addition, we expect to open over 1,000 similar veterinarian service locations through 2023.
We believe these incremental locations will help fuel total company net sales to over $1 billion with adjusted EBITDA margins in excess of 15% in the next five years. To accomplish this we will need to expand our veterinarian clinics to less than 2% of our current retail partners locations.
Today PetIQ and VIP serve over 40 retail partners representing more than 60,000 locations with almost no overlap creating a significant opportunity for future nationally in both veterinarian products and services. From an industry perspective, in 2017 packaged bags [ph] reported that pet owners spend $27 billion on veterinarian services and products and project spending to reach $34 billion by 2021.
We continue to believe that there is a large underserved group of pet owners that aren't providing the care their pets need due to convenience, affordability and awareness. These pet owners are out retail partners customers and we believe our model will help us provide the education, convenience and affordability to not only help lots of pets but fuel growth beyond what has been projected.
In summary, 2017 was a very good year for PetIQ, I'm incredibly proud of our dedicated team of PetIQ associates for their hard work and achievements throughout the year that enabled us to exceed our goals. We are pleased with our continued strong momentum and are incredibly excited about 2018, as well as the long-term opportunities for our business.
We remain committed to executing against our growth strategies to generate value for pet parents and their pets, our retail partners, employees and shareholders. This concludes our prepared remarks.
John and I are now available to take your questions. Operator?
Operator
[Operator Instructions] Our first question comes from Brian Nagel of Oppenheimer. Please proceed with your question.
Brian Nagel
My first question is, as you saw on the gross margin side, and I guess this is [indiscernible] with the integration with VIP but basically on the gross margin side, you still didn't schedule for sales in the third quarter. Consequently think about the drivers about sustainability of that line going into time [ph]?
McCord Christensen
Brian, your connection is not real clear. I guess I'll repeat back for you what I think you're asking and make sure I didn't miss anything in between but -- you talked about our gross margin as a percentage and then the nice increases that we've seen in gross margin and pickup we've seen for our last year and the reality of that continuing in the manner going forward, is that the right question?
Brian Nagel
Yes, that's correct.
McCord Christensen
Look, we knew that we had significant momentum in that area, threw a lot of things that we disclosed in our IPO and we've seen those things benefit and we continue to dig in as the Company matures and turn to have more mature staffing that is focused not just on getting the stuff out of the door but actually how we do it better and as we continue to execute well as our synergies are out there in the market, our partners see that we're doing a great job, we've been able to have both mix and our supplier partners provide opportunities for us to enhance our margin profile. As a company we can't predict the future in that area completely but we do feel like we've got a good solid base on what the model is and what's sustainable until strongly that we will continue to find opportunities to improve that and we look forward to talking with you guys the next few weeks as we deliver these pro forma's about the way margin overall as the Company changes with the introduction of services.
Now the service business is a significantly better margin profile than the product side of the business and so we're anxious to walk through that with you guys. Soon, I think your question and how you think about margin at PetIQ will be a little bit different as we start to have -- get the unit economics of what we're doing there and how that applies and how we grow now having this third leg of the stool in our business which is that services leg that has to be factored in our overall mix.
So no real change right now, Brian it's going to be sustained and continue to improve but we don't want to talk about it as we get these pro forma's filed and have the rest of the conversation.
Brian Nagel
One of the question is, we talk about now -- what's more towards the laid out of VIP -- as integration of VIP. Can you talk about some of this synergy there or with the accuracy of any idea that you have for the earnings for -- how does that actually help in your core PetIQ products as well?
McCord Christensen
Again, I'm going to repeat the question Brian because we're getting not great connection with you but I think you talked about the synergies of VIP relative to the roll out product mix and just generally how we look at the rollout and integration of the business. I think the VIP synergies couldn't be better demonstrated any better than what you've just seen as announced today.
We have a really strategic platform and we've said it before and we'll say it again, there wasn't two VIPs in the market to acquire and the best thing we had is a very mature company that was hitting it's stride that had 29 regional offices operating clinics and managing nice growth already across 31 states and we -- with not a lot of time, leverage the best of PetIQ and VIP to come together, put together a plan that allowed us to be in a position to open up 20 locations in relatively short period of time when you think of -- when we announced signing agreement, closing the agreement and now just next week opening two more stores. So we've got great synergies and just the productivity of the people and their ability and willingness and reach and I think PetIQ is a great blessing to their business as well because we can take our great relationships and give them access to a new set of customers that could accelerate the business further.
So that we're excited about. Obviously secondly, there is lots of opportunities to look at how the synergies of us now having such a significant platform of veterinarian and that demand creation and how that demand creation strengthening our Company's mode and our strategic value to really every participant in the value chain of providing healthcare for pets in the market, whether it's retailers that want to retain food traffic and build food traffic and the increased sales to their customers by having a veterinarian recommendation and that prescription is being written in those clinics.
If the animal health partners that seeded we have a path forward to increase the number of pets we're serving from a million pets to well over 6 million pets over the next 5 years making us one of the largest clinic operators and healthcare providers to pets in the country. Obviously, pet owners and giving them lots of locations to find affordable convenient access to healthcare that they are either overpaying for or not providing and we're excited about that as well.
Obviously, there will be obvious things of looking quickly at their product mix and our product mix and looking at how we help them and how they can help us and we've already implemented a number of those initiatives in just the last 60 days some -- as we start to work together. So we're pretty excited about it, now the companies are very different and so we're not going to go in and screw up anything either because we can keep them doing what they've done well and just make it better by having provide them access to more help and more resources to grow faster.
So we see the synergies as endless at this point, we're still figuring how much there is monetize there.
Operator
Our next question comes from Bill Chappell of SunTrust Robinson Humphrey. Please proceed with your question.
Unidentified Analyst
Hi, good afternoon. This is actually Stephanie [ph] on for Bill.
I just wanted to dig in a bit further about the Walmart clinic expansion, just trying to kind of figure out was this in the work when you announced expansion and provided the guidance of early January; this kind of meaning does the guidance assume some revenue contribution from the stores or barely the cost to build them out? And then kind of on that, to hit your 1,000 clinic target by 2023; that would mean your opening 200 stores per year.
Is this going to be a steady rollout from this point going forward or kind of how do we view that or an acceleration in the coming years?
McCord Christensen
We definitely had a view of the value of what services would be to our total retailer base, not just Walmart and we had some high level discussions about the potential of being able to do some of the things that we're talking about today in Walmart with various customers and the way they view the value of it and ultimately, once we knew that we were going to get to definitive agreement, we had more specific conversations with them that allowed us to accelerate going into a negotiation to move the project forward and was able to do that quickly, and there was a lot of simultaneous work going on at the same time as things were worked out during that time period so I would say we started early during due diligence having some high level conversations that got very focused once we know we were going to come to an agreement and then we got very serious around the middle of December and into early January to start accelerating our plans to make sure we could open up the clinics we just announced today. So it was something that was in the work, we didn't have a definition to it and tell after the deal was already signed and we were getting much closer where we are now; so that's kind of a timing discussion.
From just rollout schedule, yes, they appreciate that even getting 20 locations done in the previous time we did, we've leveraged 29 regional offices across 31 states and those 31 states and those offices are where the majority of the population is in our country today and when you really divide the numbers down into something that you could digest a little easier, you say okay, if every single one of those offices were to open up two locations per quarter, we almost are at 200 locations just with that kind of a magnitude of kind of schedule and we've looked at the schedule, we've looked at what the resources are until strongly that we can balance the right pace across all the regional offices to be on a position to open locations at the right pace. Now we have assumed in our modeling that it wouldn't be 20 becomes 200 immediately.
We do believe 20 can become a significant number for next year we'll talk more specifically about what those schedules are as we talk about our pro forma numbers when we share more information with all of you in the next few weeks. But we do think it will be a schedule this time something like 20 becomes 100, becomes 200, becomes 250 and continues to grow.
The current numbers that are being discussed do include the topline revenue coming from the Walmart clinics, it does not assume any EBITDA contribution. For this year we've been very conservative on what those will do, we have a lot of historical data from VIP running other clinics and we do know in the first 6 months there is a lot of investment that goes into that first 6 months and the second 12 months you see significant contribution.
So we believe the soon the traffic have another things, we'll do better than what's been projected but we do have the sales contemplated in the number and a conservative position on the EBITDA. John, relative to the capital investment?
John Newland
The capital investments have been contemplated whether it's actual expense or capital expense as well as enabled our forward-looking statements.
Operator
Our next question comes from Joe [ph] of Raymond James. Please proceed with your question.
Unidentified Analyst
First, I guess since we're talking about Walmart, I'll start there. In terms of the expansion that you got to expect, what determines the rate of that expansion; is it you guys or is it Walmart that would determine how quickly you can add those to the clinics?
McCord Christensen
Let's be clear, our forward-looking statements around location expansion doesn't require to via Walmart. We have 40 retail partners with 60,000 locations and we need less than 2% of those locations that make sense and we balanced available locations across all banners and discussions that we're having we feel confident that those are available.
Walmart is a great partner and we have nothing with them in place that says that you're going to guarantee us the next 1,000 locations but they are very excited about things that generate top line revenue for them, things that are paying better returns on empty retail space in their stores and other people, there is a significant number of available real estate locations already; so we need to go in and operate 20 great clinics and prove that we'll be a great co-attendant and partner in those locations and we believe that rest will take care of itself. But we are well under plans in other locations, we have other clinics that will open this year with other retail banners that were already in place with VIPs partners and we know those are just as important if not more important with the standing relationships that are there and the existing unit economics we already have in place and already through the full vetting process.
Walmart will be 20 locations, we have a strong belief on their contribution but the expansion at Walmart is only one part of the total landscape we think we can expand the next 1,000 locations into.
Unidentified Analyst
How should we think about the impact from a new accounting standard in terms of the shift in revenue from the first half into the second half? And how much of the -- I guess the SG&A cost move into cost of goods; is it $5 million or $10 million, I'm trying to put my arms around the type of numbers you're talking about?
John Newland
It's hundreds of thousands to a million. I mean, it's nothing.
When I use the term startle, that's everything that I choose that term in describing it though, not significant in nature.
Unidentified Analyst
And if you can give us pro forma cash debt share count now that you have deep back there acquisitions closed?
John Newland
Well, the share count is 25.7 million and we'll provide more information with our first quarter results on where we are from a cash and debt standpoint.
Operator
[Operator Instructions] Our next question comes from Kevin Randy [ph] of Jefferies. Please proceed with your question.
Unidentified Analyst
Cord, can you touch on what so the $1 billion is looking at the 2023 in sales is impressive, particularly in this environment. I wouldn't ask you to revisit some of the assumptions or at least like the color around the build out on the VIP side but what is implied in that number with respect to the base business?
McCord Christensen
The first thing is we've been messaging 15% to 20% growth rates on the business on a forward-looking basis. The base is now $450 million to $500 million it is and the reality of it is, if you run your compounded growth rate out on those numbers, we get really close to $1 billion just through what we've been performing and this last year we obviously were greater than those growth rates and obviously with what we've put together for next year we're again going to be greater than those type of growth rate.
So the $1 billion is a number for the stake in the ground that we put out there that is driven off a number of assumptions. Some of those assumptions will become a lot more clear when we put the information with the pro forma's but the unit economics of our clinic growth is going to be a key driver Kevin.
I think now we've really said to everyone is with the acquisition of VIP, the base product business is going to grow but we're going to have the opportunity to influence and be in a lot more control of drivers that will guarantee that growth rate and guarantee the top line. The real exciting thing is when we take that historical information, we look at those unit economics and take what we know how to do here and apply that for the business, we think we've got an opportunity to have a significant expansion in our adjusted EBITDA margins and a significant amount of control over how we can control the outcome on getting those numbers to be realized.
So I think we've really done and we've said this is part of this as we've added a third leg of the stool, it gives us a significant opportunity to influence product sales, influence services sales and influence at significantly higher margin business for the Company going forward. And so we've really put the $1 billion mark-up to say that's the math on what we've been saying all along and this just gives you a much greater sense to security that we have a path forward that we're going to get there and we're going to get there in a more profitable way.
Unidentified Analyst
I guess we can wait to get more specifics between -- by segment. And then the guidance court for the year is still pretty wide on the top line, what gets you to low end and what gets you to high end; one of the key variables as you see it today?
McCord Christensen
Well, I've never communicated high end if I didn't think I could get there Kevin. I think you've known by now that we don't put those ranges and just think we're going to hit the target in the middle.
So we're laser focused on hitting the high end relative to our sales in the range; I think that we've put out there from an earnings perspective is really about us saying that we need to have an opportunity to provide you with our pro forma information, show you the foundation we've put on to the business to have the real plans in place, have accelerated growth to deliver against our clinic plans. And I think everyone will agree that we have a shot to -- had a really solid grade here in the range but have the right investments that we're making to be ready for what we can deliver in 2019 and beyond.
And so it's a wide range but I think with the amount of transformation the business is going through, until we filed the pro forma's and have that next conversation, I think it's a responsible way to do it but we're very confident that everyone is going to be excited about the plans and the plans forward and what that means as we are able to give more granularity when we file the performance and have the conversations.
Unidentified Analyst
Can you talk about the current retail environment; there is tremendous amount of discussion broadly in staples right now and how difficult it is and number of companies have had issues. With inventory destocking it's difficult to take pricing, etcetera, etcetera; all things that I'm sure you're aware off.
Can you touch on that specifically to understand there is a lot of exciting things going on in the VIP side of the business but maybe talk about the base business where you actually have seen some slowing in the Nielsen data; so you guys are growing really well and now it's down to about -- or you're about 5% in the latest 4 weeks which is slowing down from mid-teens kind of growth. So I guess a couple of questions sort of layered in there; what's driving the slowdown?
And understanding that Nielsen doesn't capture everything but it does capture Walmart, so the slowing there is not worthy, maybe you can touch on that? And then broader sort of comments on the retail environment; setting aside I guess sort of the VIP expansion plans.
McCord Christensen
I think in general, the broader retail environment, there is so much out there to be read around who people believe are winning and losing, and it wouldn't be in our best interest to really comment on those because I think that information is available. We have 40 meaningful customers, our business is up year-over-year from '16 to '17 and will be up significantly from '17 to '18 across every segment, Kevin.
So we're -- we will be up in every segment, we've always talked about the growth drivers of our business and some of it is growing on a year-over-year basis on consumer awareness and transferring traffic, some of it is our model becoming stronger and having a deeper mode in our ability to replace competition that previously not organized themselves to be strategic about the business, some of it's new item introduction which at times we cannibalized our own business when you put items out there that are of a better value and you move units into lower dollar sales, it's going to affect some of that data so Nielsen is a great indicator on winners and losers but if there is a lot more layers too when you measure PetIQ and what we're doing because of the way our business model works. And you said it best, when certain channels that don't report are up significantly more than other channels that do report, the data becomes a little bit skewed.
This year in particular last 4 weeks, we have not seen the usual kick-off in [indiscernible] and as we've seen in past years it's been a little bit slower than normal. We've also done a pretty major revamp with the couple of our retail partner, our annual supply partners and retail partners to better support the long-term healthier channel strategy for their products which required us to revamp the inventory that was in the stores which means they went to zero inventory for a time while we put that new product in, we're back in fully in-stock with that item and we think it will drive increases and extend the longevity of programs that due to the channel strategy being out of balance with some of the online retailers could have caused more dramatic impact in the future.
So we did some things right for the business; so right now no one is concerned because we're seeing the data and we've been having record weeks and on-track for record months, again two months in a row, so the business is doing well right now and we're seeing some of the best days we've seen in a long time. So, I probably missed 3 questions, Kevin; so ask again if I missed something.
Unidentified Analyst
Year-over-year increase in inventory looked a bit high relative to the increase in sales; anything noteworthy there John in the quarter with respect to timing and shipments or change in terms with retailers?
John Newland
No, not really change in terms at all, it was just gearing up for all the crazy activity that we have going on today Kevin. We have serious volume going out of the door on a daily basis and at the end of the year there is a natural build that had to occur.
In order to be able to meet the demands of our customers which I'm happy to say we're still at the highest levels of meeting our customers' needs and so -- no, it was just to meet the demand for the upcoming season that we're in the throws right now and we couldn't be happier with how that positioned us for the timeframe.
McCord Christensen
Kevin, if I only could add to John's comment is, we've maintained our same 8 weeks of supply position through this entire quarter and into December of last year. A big part of it was, we took under a significant process of again -- we're aligning some of the channels in brick-and-mortar to better support what we believe the long-term strategy needs to be true to the channel strategy conversation we're constantly communicating to the market which caused us to take a big, big significant position to get that work done.
So we're completely relaxed that it relates to inventory levels because like I said it's going out the door as fast as it's coming in the door at this point.
Unidentified Analyst
Any update Cord on the fairness of Pet Owners Act?
McCord Christensen
Yes, we've been back in DC over the last few weeks, we just be having some meetings to understand what's going on. We obviously continue to be hopeful on the progress of it because we think it's the right thing for pet owners to have the choice.
Our indications from DC is that we believe it will be reintroduced in both, the House and the Senate from a Bill perspective in the next 60 days and likely in the next 30 days but again, that's an upside to drive further acceleration and obviously, taking a lot of demand cremation into our own hands with our own clinics and own veterinarians, less of a factor to drive explosive growth in the prescription category but definitely something we would welcome.
Operator
[Operator Instructions] Our next question comes from Luke Christensen [ph] of William Blair. Please proceed with your question.
Unidentified Analyst
First on the base business; it's kind of -- I wanted to hear an update on your wide space opportunities, I think previously in the base your biggest wide space is our understanding was in the drug and grocery channel, is that -- have you succeeded in winning any opportunities there that fill wide space going forward? Any color on that will be great.
McCord Christensen
We actually finished the year strong with being able to put some things together and start doing business with one of the two largest drug chains in the country and are very excited about that expansion and having that relationship start as everyone knows they've watched this, once we get our toe in and we start to execute and show the value we create for the consumer and the pet owners and ultimately just execute, we've always been able to spread out and grow and so adding access to a significant number of doors through that the expansion I think is significant. We've also seen great movement in moving into wide space inside of existing customers by expanding pretty significantly for this year.
So the base product business, we've messaged that the range is $450 million to $500 million and if you read the final print, we also messaged that the service part of our business will roughly be 25% and so we really thought the product business going to this year would be closer to $300 million and you do that math and work backwards, we're giving you a range of 75% of $350 million to $400 million which says we're on-track to be better than what we expected.
Unidentified Analyst
And then in terms of mix, is there any change to -- in the retail product business that's been distributed versus own brands? I know you guys had previously messaged that they stayed generally constant percentages, I wanted to get any updated thoughts on that.
McCord Christensen
Yes, I think we've always said that we obviously love to sell more of the stuff we make more money doing which is obviously the stuff we manufacture but in a world where our prior market size we were serving was participating in $8 million animal health products business and now with the addition of our services business we get to address the entire $27 billion of products and services both. With that kind of size and being a $450 million to $500 million revenue business, we can't always control what the mix is going to be and so what we make sure is that whatever the mix is and whatever we're doing business is, we're able to generate a better return for our Company and for our shareholders and I think that stands true, we still continue to be committed to growing the business in the way that the market needs us to grow it, innovation comes from a lot of places, at times we're bringing in things that we make more margin in, sometimes innovation comes from the animal health companies and is driven off of veterinarian recommendation and so we've had a very strong showing for many years about our ability to continue to be in front of that trend and still like we're committed to the right path forward and ultimately the mix that we'll see will be driven off of a lot of those factors in that.
Next year we're still excited about what that mix is going to look like.
Unidentified Analyst
And then switching to VIP, I'm assuming so the new Walmart locations -- I'm assuming those are permanent as opposed to the temporary clinics that VIP operates, is that correct?
McCord Christensen
So when we talk about community clinics, that would be a temporary mobile clinic, that would be more of a pop-up store, a day at a time type of an operation. When we referenced a health and wellness clinic that would be a fixed base clinic and VIP operates both types and then has a very nice history in both types of clinics.
The 1,000 locations we're talking about is the health and wellness clinics that would be the fixed base type clinics, and Walmart would be in that health and wellness fixed base clinic.
Unidentified Analyst
How many of those health and wellness clinics do you have now or does VIP have?
McCord Christensen
We're in the teens right now, mid-teens with the plans right now that they will open up another roughly similar number during the 2018 year.
Operator
Ladies and gentlemen, we've reached the end of our question-and-answer session. I would like to turn the call back to management for closing remarks.
McCord Christensen
We thank everyone for joining today. Obviously, we've shared a lot of information and a lot of information for everyone to digest.
We're -- again, couldn't be more proud of our associates, our partners and all of our great pet parents out there that continue to reward PetIQ as we execute our plans to help pets have better healthcare and access it through convenient affordable locations across the United States. We appreciate your support and we look forward to continuing to have us a very successful 2018 as we continue to implement our plans, very much look forward to providing more information in the coming weeks with us planning to have information available in the first part of April and then obviously, another time to communicate when we release first quarter earnings.
I'm sure we'll be having lots of conversations with many of you and we look forward and welcome those conversations. We appreciate everybody and look forward to a very successful and fruitful 2018.
Thank you.
Operator
This concludes today's conference. You may disconnect your lines at this time.
Thank you for your participation.