Nov 14, 2018
Executives
Katie Turner - Investor Relations, ICR McCord Christensen - Chairman and Chief Executive Officer John Newland - Chief Financial Officer Susan Sholtis - President
Analysts
Bill Chappell - SunTrust Brian Nagel - Oppenheimer and Company Joe Altobello - Raymond James Jon Andersen - William Blair Kevin Grundy - Jefferies David Westenberg - CL King
Operator
Greetings and welcome to the PetIQ Third 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. It is now my pleasure to turn the call over to Katie Turner with ICR.
Please go ahead.
Katie Turner
Thank you. Good afternoon and thank you for joining us on PetIQ's third quarter 2018 earnings conference call.
On today's call are McCord Christensen, Chairman and Chief Executive Officer; and John Newland, Chief Financial Officer. Susan Sholtis, President will also be available for Q&A.
Before 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 for the year ended December 31, 2017 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 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 third quarter 2018, supplemental presentation on our website for reference. Now, I’d like to turn the call over to McCord Christensen, Chairman and Chief Executive Officer.
McCord Christensen
Thank you, Katie. Good afternoon everyone.
Today, I'll provide an overview of our 2018 third quarter results and discuss the progress we have made on our Follow the Pets long-term growth plan. John will then review our third quarter financial results in more detail and comment on our annual guidance.
Finally, John, Susan and I will be available to answer your questions. We are very pleased with our third quarter results.
The demonstrate the strength of our diversified product and service business model. Our Follow the Pets growth plan is designed to accelerate PetIQ's rate of growth enabling us to fulfil our mission of making pets lives better with more affordable and accessible veterinarian products and services.
We are in the early stages of realizing our growth potential, yet for the third quarter we achieved our highest quarterly year-over-year growth rates in net sales gross profit and adjusted EBITDA. We generated record third quarter net sales of $131.4 million, an increase of 117%.
Net sales were towards the high-end of the quarterly outlook we provided in April. Adjusted EBITDA was $13.4 million in-line with our expectations as we further capitalized on opportunities to grow with our animal health partners and drove incremental sales of distributed products, similar to Q2.
This resulted in a shift of our product sales mix in the quarter, but had no effect on our gross margin dollars. Both our adjusted gross profit margin and adjusted EBITDA margin also improved sequentially from the second quarter of this year.
As a result of less seasonality relative to prior year periods and a strong rate of growth in non-flea and tick. Overall, we are extremely pleased with our business momentum enabling us to raise our net sales outlook for the year.
Our third-quarter results confirm that we’re on track to deliver an accelerated net sales growth in 2018, and we are progressing well towards our long-term growth financial targets of 1 billion in net sales, and 15% adjusted EBITDA margin by 2023. For the third quarter, our flea and tick business performed well and outpaced category growth.
According to Nielsen measured channels dated through September 29 the flea and tick category was down 8%. PetIQ’s results outpaced this result in Nielsen measured channels over the same period.
Our brands performed better than the overall market, non-measured sales channels were up meaningfully, and our prescription drug flea and tick was up significantly and in-line with macro trends in the broader veterinarian market. Keep in mind, for PetIQ only 37% of our Q3 sales were in Nielsen measured sales channels.
The 63% of our sales that were in unmeasured sales channels dramatically outpaced the measured flea and tick sales channels, particularly in the pet specialty club, e-commerce, and RX sales channels. We continue to see solid increases in both SKU velocity and distribution with our business spanning over 700 plus items, 7 different categories, and consisting of one of the most diversified customer bases in the industry.
We believe PetIQ is well-positioned for future growth and success. As I have mentioned previously, this includes increasing opportunities for us to participate in the rapidly growing e-commerce sales channel.
For Q3, e-commerce generated the highest channel growth rate for the seventh consecutive quarter growing at a much faster rate than the overall company growth rate. We have experienced strong e-commerce growth with key existing retail partners and starting at the beginning of Q3 we were excited to introduce our pet RX products to one of our existing e-commerce partners.
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. For Q3, our prescription drug program continues to have the highest product category growth rate of all our product categories.
More consumers are using our pharmacies to fill their scripts and a significant number of pet parents are using chewable prescription flea and tick products, instead of OTC options. PetIQ is a trusted partner for both brick-and-mortar and click-can-pick go to market strategies with a strong run rate for future growth across all sales channels.
For the third quarter. We opened two wellness centers for a total of 31 wellness centers, including our newly opened PetIQ locations and the VIPs existing wellness centers.
We also have 34 regional offices in operation at the end of the third quarter. We continue to be very pleased with our average pets per clinic and revenue dollars per pet from our VIP wellness centers and mobile clinics that have been operating for more than 18 months.
Q3 represents the strongest quarter this business has reported. In addition, we are pleased with the improved profitability we have started to generate from lower operating cost that our VIP wellness centers and mobile clinics based on our team's Q2 restructuring efforts to help increase profitability of the service segment.
In a short period of time, we have made tremendous improvements to the business and will continue to work on opportunities to gain greater efficiencies through our ongoing integration efforts. We are also pleased with the 20 new VetIQ clinics we opened in the first half of this year.
While our clinic openings were all on time and on budget through Q2, we continue to gain important learnings and perspectives from this new installation base to best understand the appropriate level of staffing, operating hours, and pet parent marketing that drives conversion. This will ensure that as these new wellness centers ramp a maturity, they achieve our expectations for sales and profitability.
We strategically opened our first 20 VetIQ's in diverse geographies and across markets with varying social economic populations to be able to take all of these learnings combined with the knowledge of the legacy VIP wellness centers and support of our regional offices to successfully support their future growth and development and prepare us to open a higher rate of future locations in 2019 and beyond. PetIQ is uniquely positioned to continue to expand our work affordable veterinarian care model across the country.
In Q3, we started focusing on enhancing operational excellence in-store and within our VetIQ wellness centers. This includes greater emphasis on demand creation through marketing initiatives to include retail partner engagement, in-store signage, and localized target marketing to pet parents.
We expect that additional performance improvements will be realized as we increase pet counts and revenues per pet while optimizing our operational cost to the balance of 2018 and into 2019. We are very excited to have added Susan Sholtis to our Executive Team as President.
She has over 20 years of executive experience leading some of the largest animal health and wellness initiatives in the industry. Susan started working with us in October 1, although she has known PetIQ for the last two years, including having served as a director on our board of directors this year.
It’s only been about 45 days since she started, yet she is already providing invaluable perspectives and contributions to our total business and our service segment in particular. Susan will lead several functions for our company, but will be especially focused on our service team as we move forward, and we're fortunate to have a proven multinational executive with a track record of developing and commercializing pet healthcare and consumer strategies to help us build on our strong foundation and accelerated the growth of our service segment.
We have the right team and strategic initiative in place to generate long-term sustainable growth. We believe our pet services and product offerings will continue to generate value for our pet parents, animal health partners, and retail partners alike.
At PetIQ, we are driving new sales and adding incremental traffic drivers for our retail partners. Helping the animal health industry grow faster by accessing the highest concentration of pets that routinely don't go to the veterinarian and ultimately, all this will fuel shareholder value.
Subsequent to third quarter on October 17, we completed the strategic acquisition of HBH Enterprises LLC or HBH. An innovative developer and manufacturer of specialty pet supplements and treats will then become a wholly-owned subsidiary of PetIQ.
We’re excited to welcome HBH to the PetIQ team after working together for several years within our Springville, Utah production facility. This unique partnership has proven to be an important element of our success in bringing pet health and wellness solutions to our customers, particularly our OTC consumable products and treats.
The acquisition of HBH provides PetIQ with complete strategic control of our manufacturing organization and the improved business structure will enable us to accelerate growth in this important category. We expect this transaction to be accretive to earnings in 2019.
As we move forward, we continue to believe that we are in the early stages of achieving our growth 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 purchased their pet’s food at our retail partners and pet households are in its highest levels, driven by millennials. 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. And with the proceeds from our stock offering that closed in the beginning of Q4, we believe we can accelerate our VetIQ wellness center rollout.
We will follow these pets and pet owners by bringing affordable veterinarian services and products to where they are already shopping for their pet’s needs. We have the opportunity to take advantage of the macro trends that are happening in the pet industry, whether it is rising pet ownership, pet humanization, and increased ageing of pets that all depend on better healthcare.
The demand for our more affordable and accessible pet products and veterinarian services is strong, and we remain committed to expand our category leadership position to fuel our future growth and value for our shareholders. With that overview, I’ll now turn the call over to John.
John Newland
Thank you, McCord. We’re pleased with our financial results.
For the third quarter, our convenient pet products, our veterinarian service offerings at compelling value, I feel strong customer and consumer relationships resulting in an accelerated rate of growth. Third quarter 2018 consolidated net sales were 131.4 million, an increase of 70.8 million or 117% over the third quarter of 2017.
Similar to the trends of the first half of 2018, our strong organic growth was primarily driven by further penetration on existing accounts with distributed products and new customer wins. VIP revenue contribution in the services segment makes up for remaining balance of the reported year-over-year growth in the third quarter.
Product segment net sales for the third quarter were $108.5 million, an increase of 79% year-over-year. Segment operating income was $14.1 million, an increase of 153%, compared to the third quarter last year.
We continue to have excellent traction in our distributed business and are focusing our efforts on establishing new customer relationships. Consistent with the results in Q1 and Q2 of this year, we experienced an ongoing mix-shift towards sales of distributed product during the third quarter, compared to the prior year period.
Services segment net revenues for the third quarter were $22.9 million, an increase of 14% versus the prior year period on a pro forma basis, assuming we had owned VIP in the year ago period. Services segment operating income was 2.3 million.
Third quarter 2018 gross profit was $24.2 million on a GAAP basis or 18.4% as a percentage of net sales, compared to 12.5 million or 20.7% as a percentage of net sales in the same period last year. Adjusted gross profit was 26.5 million and adjusted gross margin for the quarter was 20.1 %.
As I mentioned, gross margin was impacted by an ongoing shift towards distributed products, but gross profit dollars were consistent with our expectation. Third quarter 2018, general and administrative expenses were 17.6 million on a GAAP basis or 13.4%.
Adjusted G&A were 16.1 million or 12.2%. Note, we will continue to strategically make disciplined investments in our business to support our future product and services growth.
Third quarter 2018 adjusted EBITDA was 13.4 million, and adjusted EBITDA margin was 10.2%. Year-to-date adjusted EBITDA was 35.1 million, reflecting a margin of 8.4%.
There are a few additional considerations of note on G&A as you think about our business. As a result of the acquisition of VIP in January 2018, it is difficult to review direct comparisons to the reported year ago, as they are not comparable on an apples-to-apples basis.
I would highlight though that we continue to expense leverage. For example, PetIQ G&A increased approximately 400,000 year-over-year during the third quarter, while product revenues increased 48 million during the same year period.
Net income was 3.9 million for the third quarter of 2018 when compared to net income of 0.9 million for the prior year period. Adjusted net income for the third quarter was $8.2 million.
Now, turning to the balance sheet. We believe our liquidity is in great position to address our future growth following the company's successful offering of 2 million shares of primary Class A common stock, which closed just after the end of the third quarter, generating net proceeds of approximately 73.5 million.
After giving effect to the offering and the related use of proceeds, the company would have had cash and cash equivalents, but approximately 78 million as of September 30, 2018. Additionally, as we have mentioned on last quarters call, we amended our credit agreement in August to increase the revolving credit facility by $25 million to our total availability of $75 million of which $51 million remained available as of September 30, 2018.
Combined, our total liquidity was approximately $129 million, including the proceeds from the secondary offering. In connection with the secondary offering, we had an approximate $23 million increase in our deferred tax assets, and a total deferred tax asset balance of $41 million.
In anticipation of the secondary offering, the selling shareholders converted their Class B LLC interest to Class A shares on a one-for-one basis. This event creates a step up in basis for these shares and the interim generates a like amount of tax savings that will benefit all PetIQ shareholders over the next 15 years.
This is purely a cash flow item and it is not reflected on the income statement. Additionally, a quick comment on inventory, which ended the third quarter at 77 million and provided a slight seasonal source of cash for the quarter.
We are maintaining inventory levels in-line with our sales need. Our days sales outstanding and accounts receivable remain in great shape.
Now, onto 2018 outlook. We are raising our full-year 2018 net sales to reflect our year-to-date results, including a continued strength we have experienced within our product segment, primarily from the distributed product, as well as our outlook for the remainder of the year.
Specifically, we are expecting full-year 2018 net sales of approximately 515 million, which compares to our previously issued guidance of approximately 500 million. This represents an increase of 93% year-over-year.
We are reiterating our 2018 adjusted EBITDA guidance in the range of 40 million to 45 million, which represents an increase of 79% to 102% year-over-year. This reflects the sales mix shift I mentioned previously, a new product placement in customer wins in 2018.
In closing. We are very pleased with our third quarter results and remain excited about our future growth prospects.
With that overview, I will turn the call back to McCord.
McCord Christensen
In summary, the pet health and wellness industry remains robust and we are pleased with our topline momentum and strategic achievements in the third quarter. As we look to 2019, we are very excited about our growth prospects.
The majority of our product line reviews are complete, and we believe we are in an excellent position. In addition, our team is nearly complete with the development of our robust VetIQ Wellness Center 2019 rollout plan.
I would like to thank our corporate and field teams for all of their efforts year-to-date to help us achieve our results. These results and our outlook, gives us confidence in our ability to deliver our long-term financial goals.
John, Susan, and I are now available to take your questions. Operator?
Operator
Thank you. [Operator Instructions] Our first question today is coming from Bill Chappell from SunTrust.
Your line is now live.
Bill Chappell
Thanks. Good afternoon.
McCord Christensen
Hi, good afternoon.
Bill Chappell
McCord can you give us a little more color on just kind of the commentary on the store rollout and then when I say, you’re shortening it by a year, how does that path look, does that mean a massive expansion in year three, a massive expansion in year two and is this all primarily Walmart or are you talking about other retailers to get to a $1000?
McCord Christensen
Yes. Good question.
I think we’ve talked to you before that there is a time period to get the team and the machine oiled well and running well to be able to communicate accurately just how we’re going to accelerate it. As we’ve said before, John and I ran similar programs that a major retailer and actively push the pedal down it took us 12 months to get the cobwebs off the kind of schedule we were rolling was significantly stronger than what we previously communicated.
The next 12 months would be the toughest 12 months of the schedule because by the time you take the time to get the results back and information and make the decision that it is worth moving forward, we've got to get that machine up and running. We are at this stage and in enough discussions with enough locations.
We are in discussions across more than one retailer that we’re still trying our best to keep our promises to be between 80 and 120 locations next year, but we will be able to provide more color on that after the first of the year. We are in negotiations with five of our retail partners that we think fit really well and it will be more than a single retailer program and we could have a number of them fall out as the negotiations and still be able to hit our goals for next year, but I think you'll see an accelerated schedule by the time we hit 2020, 2021, 2022.
Those three years. I think next year we're going to be pushing to just meet our commitment.
Bill Chappell
Okay. And then on the product side, usually by now you have a pretty good idea of new listings and new distribution for the spring, can you give us any updates there?
McCord Christensen
Yes. I think, look I think we are through the process that we normally would be at this point.
We had a few loose ends, we’re tying up. And I would tell you that we feel great about our 2019 outlook of the business.
And we feel like we’re on track to continue on the path that leads us to believe that we are still working along the path that we’ve communicated on our long-term growth plans to build towards a billion dollars of revenue and 15% of EBITDA margin. So, there is nothing that we see right now in front of us that is going to keep us from continuing to write the momentum that we see in this category or in the unique protective piece of business that we have as we look at PetIQ and the [indiscernible] we around the business and its ability to disproportionately capture growth that’s happening through our sales channels.
So, not ready to give any specifics on Pacific retailers or distribution, but absolutely confident in our ability to knock some – be in a position we won't see another great year, next year like we saw this year?
Bill Chappell
Got it. And then last one from me, Susan since you're on the phone.
Welcome, can you, what we kind of here, I guess from sceptics is why would the animal health companies ever want to partner with PetIQ who competes against some, who used to do great market type business, you were kind of the case study of someone who not only was on one side, but now are on the other side. So, maybe you can give us a little color on your relationship background and then also, why you chose to kind of come back and work for PetIQ versus being on the Animal Health side for so long?
Susan Sholtis
Yes. Good afternoon and thank you for the questions.
To your point, I’m officially 45 days on the job, and I do want to emphasize first and foremost that I continue to be incredibly excited for this business because it only continues to grow and to accelerate. I think as many of you all know, I have had a relationship with McCord with John and with the team here for the past couple of years.
And they have only continued to build upon their business proposition. And their focus is very much a real an essential need in the marketplace.
It is really about bringing in quality, affordable health care to pet parents where they want to do business. And at the end of the day, I don't see that as a disconnect from our manufacturing partners at all.
In fact, I think it is quite harmonious relationship and we will continue to be moving forward. I also do want to emphasize that my focus moving forward is very clear as we progress.
It is number one, to continue to accelerate and to dial in our growth model for our clinic business. To ensure that we are mindfully and carefully investing in levers that we know are going to drive demand.
And then finally, it’s really to make sure that our structure continues to evolve. We’ve moved, this organization has moved from having 200 employees to 3,000 employees in record time.
And I think it’s really important to make sure that we have everybody moving in the same direction and that we have all destruction in order to meet the business needs and more specifically I think our targets for 2023.
Operator
Thank you. Our next question today is coming from Brian Nagel Oppenheimer and Company.
Your line is now live.
Brian Nagel
Hi. Good afternoon.
Thank you for taking my questions.
McCord Christensen
Hi Brian.
Brian Nagel
Hi. So, McCord, you obviously discussed a little bit in your prepared comments, just the performance of your initial round of clinics, maybe a little more color there just on how you are seeing these, I again recognize and it is over short amount of time, but how sales are ramping at these, but the underlying expense metrics then also may be discuss if we are starting to see yet, the impact of having the clinic in the Walmart and actually helping to drive better sales of your products within those stores?
McCord Christensen
Yes. Thanks for the question Brian.
Yes, it is early Brian in the schedule and we are seeing a lot of key metrics improving at the rate that we would expect them to and in-line with what we have seen in other clinics. You have an initial phase where you are just letting people know you are there and you are highly promotional in your activity.
We pulled back significantly on – our promotional activities drive conversion from a cost standpoint and then we’ve seen our kind of dollars per pet in the new locations have moved up, but they are in line with what we are producing in our legacy business on a per pet basis, which is an exciting to be this early and seeing the revenue per pet hitting the right targets for the business model. Obviously, we announced that we clearly knew there was a faster better way to drive conversions and increase pet count.
We have a project that – marketing project that we called Project Alpha that we launched just recently. There was the time at the marketing program we talked about.
I think recently as we talked with you and it has a whole different level of how we’re engaging the customer and getting to know them in their path and getting them in our clinics and that program just started hitting the clinic. So, I think this last week actually, and already this week we are seeing the type of things out of it.
And obviously Susan being the marketing expert she is and the animal health expert she is, and the team that was already in place that the IP and the work that they have done. It’s getting to nothing, but better from here.
And so, nothing has changed, it is early, but the progress is the right progress. And it’s absolutely in-line with the ability for us to go our board and have confidence that we can start moving forward with driving a much bigger footprint out across the country.
Again, I think we’ve also learned a lot about, you know as you put locations into a funnel, we’ve got probably close to 500 stores. We’ve identified across the five partners that are in the final right now that we’re working through and to get to the next phase of our development schedule and we’re definitely – learnings we did from the first one where we just said, we're going to prove that we can open up the locations anywhere quickly and affordably with the way our regional office structure is.
We are definitely concentrating our opening where we can be the most affected at how we hire, train, and retain our veterinarians within our clinics, and where we believe we will have the fastest ramp from a result perspective. And so, I think our real estate selection process is improving.
The last point is, we haven't really dug in on doing the right thing in every store from operation standpoint. We mentioned that we were starting to be in a position where we could start pulling levers and balancing hours in labor and other things to the right side of the business and letting to expand.
We have just started now pulling those levels and rightsizing the business, so that we’re not frankly having a bunch of billboards waiting for people because we are overstaffing over hour. But those things are things that are second nature for us having grown up in retail or I said, running the stores and then we wanted to get enough ones behind us to feel confident we’re making the right decision with that, and we now feel very confident that we understand the right way to invest in every way to these stores and so.
All-in-all, not a kind of specifics for you Brian, but I will tell you that the plan is working. It’s heading in the right direction and we’re ready to build more locations because of what we're seeing.
Brian Nagel
That’s very helpful. A follow-up question, I apologize if I missed this.
This is kind of mechanical in nature, but if I am looking at the way you discussed adjusted net income and excluding, I guess the clinics primarily, before you were using clinics have been open or now opened for a year, now that’s shifted to what seems to be 18 months. Why that shift?
John Newland
Yes. Brian, this is John.
That’s a great question and thanks for bringing it up. We looked at ourselves internally, and we said, we’ve been messaging all along that the maturity model on our clinic whether it’s our new wellness center or when we enter into new markets or with new retail partners, the maturity model is 18 months.
So, therefore when we evaluate the same-store sales add-back it should be looking at the exact same way. So, we just have an accurately reflect and [indiscernible] with the way our business operates.
Brian Nagel
Got it. Thank you.
John Newland
Thank you, Brian.
McCord Christensen
Thanks Brian.
Operator
Thank you. Our next question is coming from Joe Altobello from Raymond James.
Your line is now live.
Joe Altobello
Thanks. Hi guys.
Good afternoon. First question, I wanted to ask about the rationale for the acceleration in the wellness center build-out, you guys have touched on a little bit this evening, but is it more that the economics are improving or are your retail partners coming to you more aggressively and saying, hey we want your centers in our stores?
And is 1000 the right number? I mean, obviously you have to run or what if they can run here, but is 1000 the right number and could we see something north of that over time?
McCord Christensen
Thanks Joe. Good to hear your voice.
Look, the 1000 stores when you're starting from a base [ph] is a big number. Obviously, we have no intention of having a hard and fast stop at a 1000.
If there is still real estate available and our systems are running away to expand beyond there is clearly enough retail locations out there, pet and interest and we’re interested in doing more, but we’ve set a nice aggressive schedule on how to build towards, the rational for expansion is confidence in our model and our people, and definitely our retail partners that are pushing and talking to us about it and very receptive to how it balances, everything about their pet apartment. The importance of their pet parents being addressed in the store and again some of the online pressures that they are feeling.
So, we’re excited to have the opportunity. We are seeing enough out of it to expand.
We are excited to be more analytical and how we select and put locations out there. So, I think all indications are in the right spot.
Joe Altobello
No, it’s very helpful. And then if I could two, sort of housekeeping questions.
First, what was the organic product sales growth in the quarter ex-VIP? And second your guide for EBITDA for the fourth quarter does imply a fairly wide range, would you be more comfortable at the lower end or the upper end of the full-year guidance for EBITDA?
Thanks.
McCord Christensen
Joe, it’s so funny we’ve been so busy on so many efforts and initiatives and other things that we haven't calculated the organic growth, excluding VIP for the quarter yet, and that is a miss on me. I apologize.
We will get that number and get it to you. I will tell you that from the view I sat and as I looked at the third quarter year-over-year, I view the third quarter even though in the dollars it wasn't the biggest quarter, from a dollar standpoint and the earnings weren’t the biggest dollar standpoint, but the most successful quarter we’ve had from an execution standpoint since we’ve started the company.
Everybody, on all the key metrics delivered higher year-over-year percentages. We had less seasonal fall of.
We had customers and business that was produced in the quarter that was in categories, which want to see the same seasonal impact going forward and it translated into better margins and it is a ton of other better things. So, we had categories that are absolutely helped them the best year-over-year growth.
Specifically, I don't have the exact percentage, but we will spend all the time talking about the clinic expansion because it is exciting, it is new, but I will tell you the core-based business are the best quarter that we’ve ever had in the history of the company.
Joe Altobello
Understood. And [indiscernible] the EBITDA guide, upper end or lower end for full year?
McCord Christensen
I don't think we're going to change the guidance just yet. Joe, I think, if you look at the guidance, we originally gave you in the process that we guided to the lower end of it and we are on track to be above the low-end of it, but there is still a lot of business for us to be done for us to really change the guidance yet.
We were seeing quarter-after-quarter our dollars have been coming in better from a sales perspective, our gross margin dollars have been coming in consistent with our plan as we’ve had, you know the distributed items are high-cost deliver those numbers, and so if you do that math, it says that the EBITDA margin should be in the lower half, but we’re excited about what we're seeing so far in fourth quarter. So, I guess more to come when we talk to you next time.
Joe Altobello
Perfect. Thanks guys.
Operator
Thank you. And our next question is coming from Jon Andersen from William Blair.
Your line is now live.
Jon Andersen
Hi, everybody. Thanks for the question and congratulations on a nice quarter.
McCord Christensen
Thanks Jon.
Jon Andersen
Let’s see. Most of my questions have been answered, but I guess one on the products business, there has been a pronounced shift this year towards distributed products, I think relative to your own brand.
I understand why that’s the case and you’ve always said that you know you're not chasing margin rates, you're chasing profit dollars, makes complete sense. I'm just wondering as you look out, you know 2019 and you think about your products business, where the bigger opportunities might lie, is that continuing to grow the distributed side of the business at a higher rate and prescription or does it kind of maybe normalize where you see some of your own brand and OTC, start to kind of come back and so you see a little bit more of a balanced mix?
John Newland
Yes, I mean I think we’ve had this conversation a few times Jon. It’s pretty hard to say, you're ever going to get your manufacturing products to catch up with the rate that our distributed business is expanding and growing.
When you're talking about the $9 billion category, the fourth largest players that are spending the kind of money, they spend on R&D and influence across the market are really leading in and helping us feel the growth. But there is no doubt that we can improve our dollars and our dollar margin from our manufactured product goods business.
The HBH acquisition is a perfect point. The better aligned business structure there is going to absolutely allow us to get significant new business with those items in our OTC consumable business and see that we are going to see a concerted effort to see that mix coming back and helping the business more, but again, I think what you're seeing is, we have done a great job bringing the veterinarian very close to the business and participating in it with the retailers.
We’re getting a significant amount of new customers coming through and helping drive the business with a lot of consultive help and product help from the industry in total. And I think, what we are going to see is healthy great growth and, you know the product business, the best news is, the amount of leverage we are getting out of our G&A on the product side is so significant that all of it is incredibly accretive and it’s going to be a fantastic future for the business, if it just stays like it is going.
So, hope that’s helpful, but it’s just a good time for us right now on how things are working.
Jon Andersen
Absolutely helpful. On your own brand business.
So, what do you say that that those brands, whether it be pet – any of the OTC flea and tick or health and wellness brands, are you holding your own from a distribution market share perspective as you look at the current year and kind of expectations, for next year?
John Newland
Yes. As you look at us leverage the total enterprise value of what we’re providing to the retailers and you lead in with that total presentation position.
We’re getting distribution gains in our existing customers of the items that we manufacture. It’s going to fuel an expansion of that area and it will be another way we contribute profit to the business for sure.
We’ve had a number of great wins, I’m sure we will be ready to talk about after the first of the year, once they have communicated more broadly, but you will see increased store counts across the board on our business. So, we’re excited about what we're seeing.
Obviously, there is a lot of things we don't know for what the competition is doing out there, and you won’t see it until next year, but the lens we are looking through is very bright for our business and our products.
Jon Andersen
On the HBH acquisition, my understanding is, you’ve been working with HBH collaboratively within your Springville, Utah facility. How does kind of owning them, you know whether it would be tighter integration or anything else.
How does that provide a benefit to what you're trying to accomplish on the product side?
McCord Christensen
Yes. I think, first of all we have been working very closely.
We have been integrated working in the same building in the business structures since 2014. So, the integration is easy.
The big key is the business structure where it was two independent businesses, which meant you had to profit centers for the company, which may have had two steps before you really did any commercial transactions. We’ve got one P&L, one frame of mind, one team going to the market with a different threshold of margin criteria for us to compete.
So, we're going to be more competitive in what we do there. We know what business we could have accepted if we would have had the structure in the past, and we know a lot of it is still available for us.
So, I think it is a clean structure. One P&L, one team and we're going to go out and be able to close business here with that improved structure and that’s how we believe strongly we will accelerate the growth out of that plan.
Jon Andersen
Excellent. One question on the service business, I will let you go, I think it was Chappell earlier mentioned that a lot was accelerated by one-year, I didn't hear you say that, I just wanted to confirm whether you did say that and then – did you make that comment Cord, that you accelerated by one year?
McCord Christensen
That comment did come out of my mouth, not today, but it has come out of my mouth before. We have, any time you say accelerated, you're going to do something faster, and we do think that we're going to be able to take a year out of the development schedule the 1000 stores, and having said that, if we ended up just hitting the schedule with the economics that we proposed in the original schedule that would still be an incredibly positive result for the company, but from our ability to organize our self in a way to grow and expand and do more, we definitely think that that’s all possible.
We think we could do it in a less time, but the capital we have on and get the team working together. So, more to come in the future Jon, but it’s definitely a goal that we put on the board as something that we believe is possible and that we're going to start stretching ourselves get organized to do.
Jon Andersen
Okay. And then is 2019 a year though where you really have two, it seems to me like first 100 or 200 locations, you really have made sure you get those right.
You have to have the infrastructure in place, part of Susan, major part of Susan's role it sounds like it is making this happen. And then once those first hundred are operating at a high level, you know the next 900 come quickly.
Right, it becomes a process of repeatable process, should we think about 2019 as more of a kind of an investment year in the service business. We have fewer opening to may be, or like you said, I think just trying to get to 80 to 120 and really trying to kind of optimize the staffing.
You know the instore mix and applied marketing to get to the pet counts up and then the acceleration comes in future years. And the reason I ask this is, because I am talking about set [ph] expectation, trying to kind of understand expectations for earnings in 2019, so that people don't get too excited about the commentary around acceleration and bake that into a kind of a higher set of expectations for 2019.
McCord Christensen
Yes. Obviously, we exclude the results from new stores for the first 18 months, which means no new clinics are going to be included in our earnings results for 2019.
The stores we just opened will start contributing in the first quarter of 2020. The accelerated growth talks about the face of stores coming online to start that [indiscernible] maturing and being added to the modeling and so, I think our goal is to take a couple of months that we are taking now as we are doing some planning, and be in a position after the first year to give a lot more detailed view of what we see the future looking like and how it will be organized, how it will accelerate, we have a lot of opportunity to build location.
Some of those are very easy. Where we will convert a very successful community clinic to health and wellness clinic.
And when you got over 3,000 stores, we run community clinics in today. We have a big chunk of those that are on the cost of being able to be moved into permanent clinic sold.
We are looking at every option on how we just take the best way to continue to expand affordable healthcare for pets, and grow that part of our business in a faster way, in a smarter way, and there is no doubt that the team that’s been assembled already, the team that will be added when Susan reallocates resources and deals bit as she adds a piece to it, but we just think it gets better and brighter from here, but yes Jon, 2019 is an investment year in the sense that yes, we plan to open a bunch of stores, but you don't get to a really profit contribution from because of the same-store sales exclusion for 18 months. So, they need you to keep that in line, but it is still going to be a fantastic 2019 and you're going to see a very bright run rate coming forward in the next couple of years.
Jon Andersen
Great. Thanks so much for all the questions and good luck going forward?
McCord Christensen
Thanks Jon.
Operator
Thank you. Our next question is coming from Kevin Grundy from Jefferies.
Your line is now live.
Kevin Grundy
Hi, good afternoon everyone.
McCord Christensen
Hi, Kevin.
Kevin Grundy
Cord, question back on the products business which continues to perform pretty well in the Nielsen data looks pretty good more recently as well, can you talk about anything that has potentially changed whether this is competitive miss steps or otherwise or whether this is just sort of success begets more success and you are just sort of continuing to do well existing retailers and pick up some more, I just, is there anything you would specifically call out driving the positive momentum in the business?
McCord Christensen
I mean, I think Kevin, it comes back to the very fundamental strategic mold we have around the business. We first built a [purpose built] company that second-to-none gain access to all of the animal industry and then we put the gas on the fire by adding the veterinarians who are infrastructure in our strategy that allowed us to lien in and do more and demand more across the total industry because we are providing a very, very valuable need for everyone that participates in the equation.
The pet parent, the retailer, the animal health industry and everyone else. And I think what you are seeing is, all things considered we have such a unique business model, but we have got such a great protection arm that we are seeing in all contributed a better rate, but this third quarter is a perfect example of us not seeing nearly the seasonal impact we’ve seen in past years as we’re seeing that acceleration across all these other categories and as you feel and see and what that in the numbers it is just really exciting.
Again, this is a business that the Nielsen data tells a story of the past, but this business is a lot more about what happens to the front of the car and out of the windshield because it didn’t exist before we started. So, we are like you trying to just see how far we can push the limits of success and guess where it is going to go, but right now it is going places faster than we anticipated with us and we are getting an expansion in all areas.
Expanded in existing customer, we are taking shelf-space away from competitors. We are adding new customers, we are adding new product of those customers and we are seeing acceleration as the industry becomes more aware and everyone becomes aware that we are providing the value.
So, it is – like I said, for me, it was incredibly positive quarter because we are starting to see things that typically would go against us starting to be reasons we are getting acceleration and why you are seeing the results in the quarter like we did.
Kevin Grundy
Of course, and then related to the products business, very early days on the services side, but specifically with respect to products and including RX, are you starting to see an early lift at all in those limited locations on the product side of your business from the existence of the clinics?
John Newland
Kevin, we see the – like we said before, it is our chartable attachment rate of product visits and with the 30 some locations we have added this year, it is a number but in the scope of only 30 locations and what their attachment rate is, it is nothing compared to what we are seeing across our legacy VIP business, and that huge footprint, and then our retail base. So, we're very happy with the attachment rate we projected, it’s happening as it should and we are finding ways that we can improve and even do that better, but hopefully expand the rates that we are attaching, but it is happening like it should, so as we get out to 1000 locations there is no doubt in our mind that the product result that will come from those 1000 locations will be a few $300 million business for us.
Operator
Thank you. Our next question is coming from David Westenberg from CL King.
Your line is now live.
David Westenberg
Thanks for taking the question and congrats on a great quarter. Are you seeing any differences in services demanded on at the [indiscernible] newest picked locations versus what you have seen in the past that VIP and may be mobile clinics or maybe even some of the big locations that you have seen in legacy VIP clinics?
McCord Christensen
Yes, we seem very focused on our health and wellness and maintenance service menu today. Because our menus are very specific there.
There is no doubt that we’re starting to see some expanded requests and with some of the new talent we have on-board and some [indiscernible] guidance we’re looking at a bunch of things. We are also at a faster diagnostics and other things that we can do to just provide higher level of service, faster turnaround time and higher conversion rate.
So, no doubt we’re going to be adding some additional things to the menu, some things that will drive revenue for the business, hopefully be incredibly accretive to our opportunity, but David, still early days. So, we will see what happens.
David Westenberg
Thank you so much. And then just maybe one last question on the – in terms of staffing these clinics at a faster run rate, what’s the strategy for finding that [indiscernible], how does that look?
I know that’s definitely been a constraint in terms of ramping this size of clinic or the number of clinics?
McCord Christensen
Well, I think we always had a HR strategy around how we have kept the number of community clinics right that we do and it is almost a harder model for staff, and so I think we are definitely putting a lot of effort and a lot of thought and a lot of strategy in some high-level talent that’s being aggregated to help do that job. But I don't know if there is any specific strategy, but we are going to say this is how we're going to do.
I think, we know we are up against and we know how to get it done. So, let’s go and do it.
So…
Operator
Thank you. We’ve reached the end of the question-and-answer session.
I’d like to turn the floor back over to Cord for any further or closing comments.
McCord Christensen
Guys, thanks everyone for joining today. Honestly, we are incredibly enthusiastic about the progress we’ve made in our core and base business and our ability to protect and grow that base business that’s delivering the consistent results that we’ve delivered all year, quarter-after-quarter.
I couldn’t be prouder of the team and all the people to put the effort into deliver and make it happen this past quarter and through the three quarters of this year and we’re anxious and excited to continue our fourth quarter and finish the year as strong as we’ve handled all the other quarters. Thank you for all of you who have listened in.
Thanks for our shareholder. Thanks for our analysts who have done such a great job this year and we look forward to talking to everybody in the next quarter release and through some of the calls is the next few days.
Thanks everybody.
Operator
Thank you. It does conclude today's teleconference.
You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.