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PetIQ, Inc. (NASDAQ:PETQ)
Q3 2020 Earnings Call
Nov 5, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the PetIQ Third Quarter 2020 Earnings Conference Call. [Operator Instructions] [Operator Instructions]

I would now like to turn the conference over to Katie Turner, Investor Relations. Please go ahead.

John Newland -- Chief Financial Officer

Good afternoon, and thank you for joining us on PetIQ's Third Quarter 2020 Earnings Conference Call. On today's call are Cord Christensen, Chairman and Chief Executive Officer; Susan Sholtis, President; and John Newland, Chief Financial Officer. 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 or those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission, into 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.

Please note on today's call, management will refer to certain non-GAAP financial measures, including adjusted gross profit, adjusted net income and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures will provide useful information for investors the presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with GAAP. Please refer to today's release for a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. In addition, PetIQ posted a supplemental presentation on its website for reference.

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

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

Thank you, Katie, and good afternoon, everyone. We appreciate you joining us today to discuss our third quarter financial results. I will begin today with an overview of our business and strategic results for the third quarter. Susan will provide detail on our services segment and John will discuss our quarterly financial results in more detail. Finally, Susan, John and I will be available to answer your questions. We believe the diversification of our business model has helped us this year. The product segment has really fueled our financial results year-to-date can reduce some of the financial impact from the services segment.

As many of you know, the second and third quarter of 2020 were harder to navigate than prior years given the impacts to our business from COVID-19. That said, I could not be proud of our team, all of whom stepped up and worked incredibly hard. The insert PetIQ was as best positioned as possible in this dynamic operating environment this includes collaborating on solutions for key business challenges and opportunistically capitalizing on areas of our business where there was a need for our pet health and wellness products.

As I noted in today's press release, we experienced an atypical business cadence for the majority of the year in our products and services segment, resulting in episodic surges in demand and extensive temporary veterinary clinic closures. This has made our quarterly year-over-year comparisons less indicative than our year-to-date comparisons when measuring the strength and momentum of our underlying business trends, based on our year-to-date results and key programs already planned for 2021 and we have tremendous confidence in our future growth trajectory.

Focusing on our quarterly results in more detail, recall that in Q2, the product segment delivered the largest quarter in the company's history for both sales and profitability. As a result, we communicated to you that our Q3 product segment would be down in both sales and profitability year-over-year and compared to the second quarter of 2020. While we benefited from owning Perrigo Animal Health for a full quarter, and a partial contribution from Capstar, our product segment net sales were down slightly more than we anticipated due to an unanticipated early transition of a program with a key retailer to support growth for 2021.

This resulted in sales at the lower end of our guidance and adjusted EBITDA below our expectations. John will discuss this in more detail. The important takeaway here is that we believe this volatility is transitory and a result of COVID-19. Year-to-date, the products segment is outperforming our original expectations for the year, with net sales up over 20%. As a result of our ability to grow and work collaboratively with our retail and e commerce partners, we plan to invest in production and distribution capacity beginning late this year and into early next year.

This also supports our confidence in PetIQ's long-standing relationships with our distribution partners, which we expect to continue to grow significantly in 2021 and many years to come. During the quarter, we successfully completed the acquisition of Capstar. And after owning the business for three months, we believe we have clear line of sight to conservatively achieve our stated greater than $20 million of incremental EBITDA contribution in the full year of 2021.

When looking at the year-to-date results for Capstar, it grew greater than the broader market, and we believe this momentum will continue into 2021. Taking a closer look at our products segment for the third quarter, sales were led by our e-commerce business that was up over 29% versus Q3 of last year. Our non Rx e-commerce business was up 38% year-over-year for Q3. Our manufactured e-commerce business was up 161%, including Capstar or up 92.5% excluding Capstar. Our products team emphasis on winning at both retail and e-commerce is paying off.

Our distributed and manufactured product sales mix continued to improve beyond the 75%, 25% historical sales mix for the quarter, and we expect to see further improvement in 2021. Shifting to our services organization, our team aggressively executed our reopening plan in Q3. We are pleased to have read our stated objective with 95% of the services segment reopened, and we're in the final stages of having all of our wellness centers and mobile clinics reopened.

Although our openings continue to demonstrate that we have returned to pet count an average ticket per pet, in line with our numbers pre COVID-19 and ahead of the prior year period, we are continuing to experience COVID-19 headwinds caused by having to close 12% to 16% of links in operation due to employee absenteeism. This is caused by employees calling in with COVID-19 related symptoms and illnesses across our national services network. We hope this will improve very soon, but are pleased to report that the clinics that are operating are delivering the individual profit contribution we would expect from those operations.

The Service segment results were in line with our expectations for the quarter albeit below the prior year as we expected from the temporary closures. Our management team estimates that the third quarter impacts of the services segment for these closures was approximately $27.5 million of revenue and approximately $6.2 million of adjusted EBITDA. Total Services segment revenue for the quarter would have been approximately $39.6 million and adjusted EBITDA of $5.9 million if the Services segment achieved its budget.

Despite the headwinds in our service operations during the temporary closures and the closing of Capstar on July 31, we remain in a healthy financial position. We continue to have ample liquidity and and financial flexibility with our cash on hand, cash generation and existing availability under our revolving credit facility. In fact, in addition to adding future manufacturing capacity for our products segment, we're also strategically investing in our services segment to support our long-term growth trajectory.

We are pleased to have Dr. Lauren Leveson on our team as Chief Medical Officer. She's doing an excellent job working with Susan to build out a robust organization to support both our expansion of telehealth and the resources needed to fuel our growth in 2021 and beyond. We have a strong recruiting platform in place and are making continuous improvements to best position our Services organization as we return to a more normal wellness center opening plan for next year.

We believe PetIQ's mission of delivering smarter options for pet turns to help enrich their pets lives through convenience and affordable access to veterinarian products and services has never been stronger. In summary, PetIQ remains uniquely positioned in the animal health industry with our vertically integrated product manufacturing and distribution platform and an unmatched national footprint with convenient access to veterinarian services, prescriptions and OTC medications at a value.

While our financial results have been impacted by COVID-19 in their interim, we have many reasons to be very optimistic about 2021 and beyond. Both our product and services teams have maintained excellent relationships with our retail and e-commerce partners positioning us well for sustainable growth in an industry that continues to experience rising pet adoption, increases in dollar spend per pet and an emphasis on affordable, convenient pet healthcare. We believe our complementary and diversified model will continue to resonate with pet parents. We expect to exit 2020 in a stronger position with clear line of sight to new incremental growth opportunities across our pet products and services offerings.

With that overview, I'd like to now turn the call over to Susan.

Susan Sholtis -- President

Thank you, Cord. Third quarter has been meshing but energizing and completely about teamwork and partnership for the services segment. We are grateful to report that we are in a strong position at the end of third quarter. In line with our stated expectations, we reopened 95% of our community clinics and wellness centers as of September 30. We will reopen the balance that are remaining in Q4.

I am thankful for our team and our partners who both worked tirelessly together to reopen our wellness centers and community clinics, and I'm even more pleased that we work together to ensure the health and safety of all our employees our retail partners employees and the pet parents we serve. As you can imagine, maintaining social distancing remains a continuous focus and critical concern. In every clinic we operate both wellness and community we've implemented curbside service or a virtual line management process in order to meet pet parents' needs but also manage lines.

In addition, our clinic staff operates under a new set of safety protocols that help to keep all people protected and safe. In the midst of all of this, we celebrated eight wellness center grand openings in the third quarter ahead of schedule. 50% of our openings were greenfield clinics and 50% were community clinic conversion. The pandemic resulted in the strengthening of our relationships and long-term planning with our retail partners. Our pet parents made it known to our partners that they relied on our services to take care of their posts.

These openings now bring us to a total of 99 wellness centers open for Q3. We have 19 new openings slated for Q4, which keeps us on track for our 27 new wellness center commitment for 2020. In addition, we've been working diligently on our clinic launch plan for 2021 and have already started building clinics slated to open in Q1. Our total wellness center build out plan for 2021 will be in a range of 130 to 170 new wellness centers.

I mentioned in previous statements that early in the pandemic, the services team worked on, number one, getting our clinics back up and running with the right protocols in place; but two, I want to emphasize that along with launching innovative platforms like telehealth and telemedicine, we also prepared the organization for the next four years of build-out. To that end, our Chief Medical Officer, Dr. Lauren Livestand we organized and relaunched our veterinary structure in Q3 with one of the objectives being to attract and retain the veterinary talent we require to become a long-term sustainable player in this space.

Through our growing recruitment team and the medical affairs organization, we continue to enhance and build our veterinary recruitment efforts across the country to support our growth for 2021 and well into the future. In addition to the reopening of our wellness and community clinics, our 37 field offices are open and fully operational, running twice as many clinics in September compared to August and continuing to ramp in October. As Cord mentioned earlier, our newest challenge is managing COVID related symptoms and/or illness with our teams.

While we have the required protocols and procedures in place, week-to-week approximately 12% to 16% of our community clinics and wellness centers are temporarily closed due to employees with COVID-19 symptoms or infections. This dynamic is in line with traditional veterinary clinics as staffing levels are often kept at a minimum with no additional support staff to backfill. As we move forward, we are optimistic this level of absenteeism will improve. But as you can imagine, it makes forecasting results much more difficult in the near term.

However, we do view this as transitory in nature and believe we are incredibly well-positioned as the impact to services related businesses, in particular, begin to improve as a whole, relative to product only related businesses, which have outperformed in the last six months. That said, in total, I'm thrilled to report that even in the ongoing and very dynamic COVID-19 operating environment we have experienced solid increases in pets per clinic and dollars per pet.

In fact, our results for these metrics are quickly coming back in line with prior year and continue to escalate even considering the traditional historic business seasonality for the same period last year. These are very encouraging metrics for our business and speak to the pent-up demand in the industry for veterinary services. Over 40% of our pet parents are new, and many of them already have a full-service veterinarian, but are often experiencing long wait times until they can get in with their pet due to enhanced safety procedures and shorter or more limited veterinary schedules as a result of COVID-19. So how are we doing with our pet parents.

In our recent surveys at pet parents that have used our services upon reopening, over 90% are likely to recommend us to friends or family, survey results which are inclusive of our new procedures. We are very used with the high pet parent satisfaction rates. In this time of heightened uncertainty, pet parents are seeking out solutions for affordable veterinary care at increasing rates. And PetIQ's national network of convenient and affordable clinics are the perfect solution to meet their needs. Our value proposition strengthens and relevance every day as news channels focus on record-setting numbers of COVID positive cases.

I do want to talk for a minute about our pet parents. And pet parents that have been financially impacted during this pandemic. 2/3 of the pet parents we serve make less than $60,000 per year, and more than 55% of them are baby boomers or in the ages of 45 to 75 years of age. PetIQ's value proposition to pet parent remains a key component to our future growth. We already knew pre pandemic that pet parents believe their biggest challenge and caring for their pet was the cost. Today, the data and the demand tells us this challenge is consistent and in many circumstances, value for veterinary services is higher than ever before.

We believe PetIQ's leadership position in the market, the strength of the relationships with our host retail partners, the team we've put in place and the years of growth that lie ahead for our business position us well to capitalize on these and other opportunities within pet health and wellness. At the same time, we are focused on and have a tremendous opportunity to serve more millennials that are increasingly becoming pet parents.

We know they welcome lower cost veterinary services and are more likely to seek retail locations to provide those services due to their convenience. As you might expect, we talk to our boomers and millennial pet parents differently. We leverage our digital platforms for each of them differently. As we continue to add new wellness centers, we will also continue to become experts on pet parents and how to engage both new and existing pet parents alike. Finally, I'm proud to say that, today, PetIQ offers telehealth services in all 41 states that we operate.

In order to enable us to have a veterinary professional available to our pet parents 24/7. In addition, we currently cover approximately 50% of the states that allow us to establish relationships with pet parents via telemedicine. We expanded our telemedicine platform in Q3 to include Ohio as well.

We've generated tremendous groundbreaking learnings throughout this process and, importantly, have found that pet parents are most often seeking basic pet health and wellness advice, which tells us there's a definite need in the marketplace to support that parent when and where they want to receive that information. In conclusion, I would like to thank our team for the resilience in the face of COVID-19. Every team member has helped us weather the storm and never wavered in the process. We are emerging from this pandemic with a more contemporary and nimble organization, which will serve us well into 2021 and beyond.

With that, I'll pass the call over to John.

John Newland -- Chief Financial Officer

Thank you, Susan. Our third quarter results reflect a certain lumpiness in our business related to COVID-19, which is outside our historical business seasonality. This was particularly evident in our product segment, which benefited from a surge in retail and e-commerce demand in the second quarter. As we communicated to you last quarter, we expected product segment net sales would be down year-over-year in Q3. In addition, late in the third quarter, a key retail partner transitioned a significant product program earlier than anticipated to fiscal 2021, which resulted in the approximate loss of product segment net sales of $5 million and $4 million of adjusted EBITDA.

As a result, Q3 consolidated net sales are at the low end of our $160 million to $170 million guidance range, and adjusted EBITDA was below our expectations. Keep in mind, the product segment did benefit from additional sales of manufactured products, including a full quarter contribution from Perrigo Animal Health and a partial quarter contribution from Capstar. Importantly, on a year-to-date basis, our product segment has outperformed our expectations with net sales up 20.4% to $580.7 million and adjusted EBITDA increased 65% to $92.4 million.

We estimate the COVID-19 related impact on temporary closure of our services segment to be approximately $27.5 million in lost net sales and a reduction of $6.2 million in adjusted EBITDA for the quarter if existing service locations had remained opened and performed at budget. On a year-to-date basis, this equates to $75 million in estimated loss net sales and $15.6 million corresponding reduction in adjusted EBITDA.

Based on these estimates, the services segment net revenue would have been $39.6 million with an adjusted EBITDA of $5.9 million for the third quarter of 2020 if existing services locations had remained open and performed at budget. On a year-to-date basis, net revenue would have been $110.3 million in net sales and $19.6 million of adjusted EBITDA. Consolidated net sales decreased 12.9% to $162.1 million, primarily due to the temporary closure of the clinics in the services segment and following an unusual surge in product segment orders in Q2 related to COVID-19, which corrected itself in Q3.

Third quarter gross profit increased 18.2% to $32.3 million, and gross margin increased 520 basis points to 19.9%, even as the company experienced an estimated 391 basis point headwind from the temporary services segment closures due to COVID-19. Adjusted gross profit was $35.6 million and adjusted gross margin was 22% for the third quarter of 2020, when costs associated with the temporary services and closures are added back. If our loss margin from these closures was also included adjusted gross margin would have been approximately 23.8%.

At the segment level, our product segment net sales for the quarter were $150.1 million a decrease of 7.1% year-over-year. Importantly, as I mentioned earlier, on a year-to-date basis, our product segment net sales are up 20.4% to $580.7 million, and adjusted EBITDA increased approximately 65% to over $92.4 million. Our year-to-date product segment results are ahead of expectations that we had for the business at the start of the year.

Consistent with recent trends, our e-commerce channel experienced disproportionate growth, and our manufacturing business continues to dramatically outperform our goal of 25% sales growth due to the success we've had integrating our brands such as PetArmor into the customer network. Combined, we realized a nice gross margin lift when coupled with our fixed G&A in the product segment. We were able to generate healthy operating leverage which is a primary driver for the strong growth of segment adjusted EBITDA year-to-date.

Within our services segment, net revenues were $12 million compared to $24.5 million in the same period last year. As Cord and Susan discussed, due to the COVID-19 related temporary closures of the service locations, the company generated much lower revenue during the quarter than in the prior year period. As a result, we reported adjusted EBITDA loss of $200,000 compared to $7 million of earnings in the third quarter of 2019. Finally, adjusted EBITDA was $12 million. And on a year-to-date basis, we increased adjusted EBITDA of 7.5% to $54.8 million.

If you factor in or add back our estimated loss of $6.2 million of adjusted EBITDA from the services segment, our third quarter adjusted EBITDA would have been approximately $18.2 million, and our year-to-date adjusted EBITDA would have been $74.4 million, an increase of 46% year-over-year. Assuming existing services locations had remained open and performed at budget. In this scenario, we are actually tracking in line with our original guidance of $80 million of adjusted EBITDA for full year 2020. Turning to our balance sheet and liquidity.

As of September 30, 2020, our long-term debt balance, which is largely comprised of our revolving credit facility, term loan and convertible debt was $361.7 million. We had total liquidity of approximately $152 million. We also have an additional $15 million available via an accordion feature of the credit agreement for a total of $167 million of available liquidity. Working capital increased to $146.7 million for the year-to-date period ended September 30, 2020, versus the prior year.

This is primarily due to the $123 million of net proceeds from a convertible note offering, offset by the purchase of Capstar. When combined with our available liquidity the consistent positive contribution from our product segment, puts PetIQ in a position to drive free cash flow and build cash in the quarters ahead as well as opportunistically pay down debt. From an outlook perspective, we are not providing fourth quarter or full year 2021 guidance at this time due to the uncertainty surrounding the impact and duration of the COVID-19 pandemic on our services business.

As we noted in today's earnings release, while 95% of the company's community clinics and wellness centers have been reopened as of September 30. The services segment continues to experience an elevated level of absenteeism due to COVID-19 related illnesses. As a result, 12% to 16% of the services segment operations are temporary close week-to-week in an effort to keep employees and pet parents safe. Keep in mind, for the fourth quarter, we expect more normal margin contribution from the Capstar product now that we have sold through the on-hand inventory that was at our historical distributed product margin profile.

We are very pleased with the CapStar results in the three months since we have owned the business. Our team has greater confidence about the incremental growth potential now that we have completed the acquisition, and we believe the $20 million EBITDA estimate for fiscal year 2021 is very achievable. In closing, we are pleased with our year-to-date financial results in what continues to be a dynamic operating environment. The financial strength that our product segment provides to our broader business as an important component in the resilient nature of PetIQ, particularly in an uncertain environment like we face today.

The three strategic acquisitions we have completed in the last three years have been highly complementary and provide us the flexibility to maintain a long-term view of our strategic and financial position. We believe our diversified business model will enable us to emerge from this period of disruption and an even stronger position with broader capabilities to bring convenient and affordable pet wellness products and services to pet parents in the formats that best fit their lives.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jon Anderson with William Blair. Please proceed with your question.

Jon Anderson -- William Blair -- Analyst

Hi, thanks. Good afternoon, everybody. I wanted to start just by asking, it sounds like there was unanticipated transition in the products business with a customer that was really the source of the sales well, the EBITDA shortfall in the quarter. Could you talk a little bit more about -- is that something that is a one quarter event, meaning that's in the rearview mirror now? Or is there a little bit of a carryover effect into the fourth quarter, relative to maybe your initial plan?

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

Yes, John, thanks for the question. This is Cord. I think, first and foremost, you understand that there's a positive side of this, where the customer us work through a plan to put them in a much better place, and we'll see a very significant fall that will take place in Q1. So the business is going into a healthier place into next year. Obviously, the $5 million of revenue hit for the quarter was not anticipated, and we were given the message after we've given guidance. The EBITDA impacting so much on that amount of sales isn't just because the margin was so significant.

It's also because we took a fairly significant accrual in Q3 for the impact in Q4 because that's the accounting principle for when you're aware of it coming. We believe we've accurately captured the Q4 impact. But again, there's some unknowns there, but we don't believe it will be significant. That's why it's such a significant impact here. And if it wasn't for that we would have been in the range on the earnings as well. And again, it positions us extremely well, and we have great line of sight from our line reviews and other things for 2021 to be an exceptional year for our products business.

Jon Anderson -- William Blair -- Analyst

Excellent. That's really helpful. On the Service side, is there anything that you can say about the trend, I mean, in absenteeism? Has that been getting sequentially more challenging? Has it been steady for a period of weeks or months now. And what are your thoughts on tiny, maybe for that to improve? Is there anything that you can do kind of proactively to facilitate that? Or are all the mechanisms already in place to to be as good as you can be there, I guess.

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

I'll let Susan answer that question.

Susan Sholtis -- President

John, thank you for the question. So the absenteeism right now stays within the range, and it has since the beginning of September. So we've stayed within that 12% to 16%. It just -- it ebbs and flows between that 12% and 16%. And we -- what we do is work very hard behind the scenes to fill and to substitute staff in order to fill in those clinics and not have to cancel them. The issue becomes -- it becomes much more difficult to fill with staff at the last minute when there's a COVID illness. For example, we take our staff temperatures prior to clinics.

And if we have someone that registers higher in the temperature range, then obviously, that individual is not going to be working for the day. And if that individual happens to be a veterinarian, then we're closing that clinic for the day. We don't have enough time to basically turn our heels and be able to refill that clinic. But there are -- it's something that we monitor daily. We literally have a stand up every morning to review what's going on. And we backfill every time that we do have line of sight in our ability to not have to close the clinic. I also think that it's important to note that, particularly with our community clinics, we also adjust our routes.

So we have -- if we have the ability to adjust our routes the last minute, we can do that. And what we do is we ensure that we're targeting those routes in areas that we know have a higher peg count. I think the last comment that I would make is that we've remained close with other service facing businesses. other veterinary -- obviously, stand-alone bricks-and-mortar veterinary clinics as well as a retail partner that I was just speaking to this morning who is in Pet Specialty, who's had to close stores because of the same thing.

So I think that we're seeing it just in service placing businesses across the country, but we are, I think, in a good place in our ability to be able to continue to try to backfill those positions. But I would say that, that, at least now through the balance of this year, my expectation would be that we'll probably stay within that 12% to 16% range until we've got better line of sight of it. It's completely subsiding.

Jon Anderson -- William Blair -- Analyst

Susan, that's helpful. Last one for me. The outlook for the number of new locations or centers next year, $130 million to $170 million. How do you -- could you talk a little bit about the visibility into that? I mean, how many of those are kind of already committed? Do you have a sense of the mix of retailers that you could talk about? And it sounds like you've built some internal capability or you're building some internal capability to trans staff the clinic or the centers as you build them out. Is there a pain point there just in terms of finding and recruiting and hiring enough test to accomplish that plan?

Susan Sholtis -- President

Yes. No, it's a good question. I think that the -- so first of all, we -- the clinics that we spoke about in the call, the 130 to 170. We have a full line of sight on all of those clinics. I think that I also mentioned in the call, something really important that happened during the pandemic was our relationship with our retail partners. We literally had the ability to start to plan out beyond 12 months. So we are well into two and three years with some of these partners and planning out these locations.

So my comfortability level is 100% in regards to our build out. I think as we've mentioned before, we are moving more toward a shift in how we -- in what types of clinics we open. And we will be -- in 2021, we will be closer to a 60% conversion clinic, 40% greenfield clinic type of a mix. And in regards to recruiting. So we literally start recruiting three months in advance.

And I know that sounds crazy. But we start recruiting very early ahead a couple of things that we've done that we also mentioned as well, too, is we have -- we beefed up our recruiting team, number one. But number two, I think, more importantly, is the new structure we've put in place with our medical affairs organization and our Chief Medical Officer, Dr. Lauren Olesen. So we have programs in place where we go out. We have partnerships with universities now that we didn't have previously. And so we feel very good about 2021 and our ability to get these babies up and running.

Jon Anderson -- William Blair -- Analyst

Thank you. I think I appreciate.

Susan Sholtis -- President

Thank you, John.

Operator

Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Steph Wissink -- Jefferies -- Analyst

Question really is on your comments on e-commerce. I think you mentioned disproportionate growth. If you could just help us think about channel mix and where you see the opportunities over the next couple of quarters, that would be helpful. And then, John, one question for you. I didn't quite catch it, but I think you gave us an adjusted gross margin figure of 22% and then an adjusted-adjusted gross margin at 23.8%. Can you just help us square up that margin adjustment factor? And then how you're thinking about margin either from a mix or an opportunity perspective going forward?

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

Thanks, Steph. Steph, I'll take the first question relative to the mix with our channels and with e-commerce, then I'll let John answer your question relative to gross margin. Obviously, in the second quarter, we saw just a significant increase in online sales. And at one point, we saw a peak of almost 55% of our product sales in second quarter to the online space. Here in Q3, we've seen, albeit a much stronger number than prior years, but that number is now down below 40% of our product sales, and we're definitely seeing the brick-and-mortar channel start to get more normalized from a share perspective.

And so we are definitely seeing that. One of the good positives we've seen, obviously, is just how significant our own sales are increasing, where without the Capstar contribution, we've seen an increase of our online sales of our own brands of almost 92.5% and have seen real focus and capabilities that we started to build-out in anticipation of this these days coming, just really take hold and drive those online sales.

So I think, albeit, we all believe that the online channel is still going to be incredibly important as consumer habits have changed and definitely during cove in people are definitely using it, and it's definitely becoming more a habit and more part of their normal purchasing patterns is what we're seeing. But it is not the panic purchasing is the only channel available that we saw in second quarter, and we're seeing some more normalized distribution across some of the brick-and-mortar customers as well. I'll let John go ahead.

John Newland -- Chief Financial Officer

All right. Thank you, Steph. On the adjusted gross margin percent, 22% is where we came in. 23% contemplates additional headwinds associated with COVID-19 impact have the not been present, then we would have run at that higher gross margin percentage overall. And then I'm sorry, remind me of your second question there.

Steph Wissink -- Jefferies -- Analyst

Just wanting to understand the underlying gross margin that you'd like us to think about for the business under the new structure with the acquisitions and the service product balance.

John Newland -- Chief Financial Officer

Sure, you bet. It's a great question. As you know, we've seen great margin accretion over the past year associated with the Perrigo Animal Health acquisition, and we expect to see even more margin accretion going into 2021 and as we include the Capstar line of business and kind of our overall portfolio. So the accretion will continue, and we're really excited about what it represents going into next year.

Steph Wissink -- Jefferies -- Analyst

And John, if I could just clarify, you're saying accretion to the 23.8% or accretion to that 22%? I just want to understand what the decline is that you're referencing when you're thinking about the bridge.

John Newland -- Chief Financial Officer

Yes, it'd be accretion to the 23.8% because in all of this, we're assuming the COVID effect on our services organization normalizes in Fiscal '21.

Steph Wissink -- Jefferies -- Analyst

Wonderful. Thank you very much.

John Newland -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Bill Chapell with Truist Securities. Please proceed with your question.

Bill Chapell -- Truist Securities -- Analyst

Thanks, good afternoon. Yeah. Can you just help -- in layman's terms, understand the transition from the customer in the quarter? I mean, it sounds like Walmart had an in cap or center cap plan for September, October, November, flee and tick, and I guess they decided to put pettet or something else in there because they felt flees was ended. And so they just punted it to 2021. Is that a fair characterization of it?

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

That's not accurate, Bill. This particular opportunity was in the club channel, where we put together a very significant program each year for them that gets shipped in, in January and stays usually for the year. We look at the results and decide what's the best way to move forward based on the market and their customers response to that program. And determine that there was prior data that said we could do even better. Some of that, we believe, was impacted during COVID where the item did not have a ample opportunity to perform during to but as customer counts were restricted and people getting access to the store restricted.

However, the item did well for them, but we did look at the data together and determined that it would be a program that we could generate more sales and profit in 2021, we made a decision that we'd make that transition toward the end of the year and their executive management team, I think, due to covet inventory issues turned off the inventory sell-through and purchasing. Early, which created the impact and the accrual once that started, we had to take the accrual into there.

So the sales are, in fact, going into next year. We had to have an impact that was unanticipated for this year. But it positions us extremely well for what next year is going to be and how we're going to be to deliver the numbers we're now budgeted to do for next year. And maybe just help me understand how maybe the program you do every year, and it was kind of pushing it here. I'm trying to understand how that's incremental. Well, we know that the program that we're putting in is a program that has higher contributions than this program.

That's one of the reasons we're doing it. So we have the historical years and years and years of being the vendor of record. And so as we've looked and tried different things for different reasons. We have the exact information from how this has historically performed and it's performed better than what this one did. So we made the decision with the retailer to move into that for next year.

Bill Chapell -- Truist Securities -- Analyst

Okay. And then Switch tan on kind of product. So as I'm sure you're well aware, your exclusive agreements with two of the animal manufacturers, I think, expire this spring. So can you give us any update or any thoughts on exclusivity, whether you maintain that, the relationships you maintain that? Or -- and for that matter, if you will actually put out announcements between now and then if if there is some movement on that, anything would be -- any color would be helpful.

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

I appreciate the question, Bill. So first to clarify the point, we are fully contracted with those companies through the end of next year, not through the spring. We have finalized exclusive budgets with them for next year. They go through the end of 2021, and we are in the middle of very positive conversations about how our relationships are expanding to include additional responsibilities and in discussions around renewals.

We see right now, at this point, no risk of the renewals taking place and continuing to maintain those beyond next year based on how those conversations are going. And if we were allowed to formally announce those renewals when they're finished, we will, some of that's through our dreams and what they let us say what they won't, but we definitely will verbally do these type of calls, give people updates about it, and they'll see the flow-through in the numbers.

But we have budgeted with them and internally to have that business exclusively for next year across all the current customers and channels, and we fully expect to have it in our budget numbers as it's in their budget numbers as well. So we're in great shape for all of next year. And like I said how the conversations are going, we believe it goes well beyond next year.

Bill Chapell -- Truist Securities -- Analyst

That's great. I think I don't realize there were 3.5-year type contracts. So that's great to hear. Last one, sorry, squeeze one in. Susan, I mean, I understand you have visibility into next year's build out because it was kind of this year's build-out. So what is the potential upside in terms of finding new locations that weren't already kind of expected for 2020 that have been moved to 2021, but where we could see possibly a 200 or even 300 next year?

Susan Sholtis -- President

Yes. Thank you for the question, Bill. So we'll stay within the range of 130 to 170 with our partners. We literally, probably three months ago as we were all in the midst of our state home orders. Cord had top-to-top meetings with all of our retail partners to really lay out plans that would work for both parties, for ourselves and for our retail partners, just from a magnitude standpoint.

And this is literally where we landed. So our expectation is that, again, we put the -- we slowed this year. We're meeting our commitment for this year to get those up and running and actually opened eight of them in the third quarter ahead of schedule. And our plans, we've already started to build toward the 130 to 170 for next year.

Bill Chapell -- Truist Securities -- Analyst

Great, thanks so much.

Susan Sholtis -- President

Thank you.

Operator

Our next question comes from the line of David Westenberg with Guggenheim Securities. Please proceed with your question.

David Westenberg -- Guggenheim Securities -- Analyst

Hi, thanks for taking my question. I'm going to layer one on to Steph's question. We did see huge growth in the online channel, which implies kind of a little bit slow and brick and metal retailer. Can you talk about the long-term health and specialty retailers. We just saw one close 300 stores or plans to and then I just want to kind of talk about that in terms of perspective, both in terms of selling products first and then secondary in terms of adding clinics in retail?

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

Yes. Thanks, Dave, for the question. Obviously, we watch very closely all of our brick-and-mortar retailers and all of our online customers well and assess the health of the business and there's no doubt that there's definitely companies that are doing better than other companies that retain their customers, keeping their traffic, operating the environment, and we are seeing some of the weaker ones have issues. And and wash out, and we're seeing the stronger ones get stronger.

The good news for us, we have actually seen our share in our categories go up this year versus prior years, which is unusual for most of the companies that are in the space. We've seen our share expands across really all of our channels. And that really implies when you look at the number of doses that we're doing right now across the brick-and-mortar channel is that where weaker companies have gone away. Our customers are finding our brands in the stronger companies that are surviving.

And so we really have seen some of the volume move around in that case. And I think that's what we've just basically been able to see and maintain that good retailers are surviving and our products are thriving in those environments. Our doses are up at all-time highs, and our share is up. And I think right now, if you go look through any of the data, you can pull we're running second in share and number one in doses right now for virtually all competitors for our main categories.

David Westenberg -- Guggenheim Securities -- Analyst

Got it. And then can you talk about the long-term monetization strategy around telemedicine can you help us frame the market size right now and maybe where it can go, maybe speed here because we're getting a lot of questions on that one with the recent announcement from an online retailer.

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

Yes. So we -- obviously, I'll answer the first part, and then I'll let Susan fill in on some comments if I missed something. We obviously sell that retailer well and we love the fact that they've added the telehealth platform to bring more attention and to help pet parents find good information, but it's really a telariae platform that can give advise and get you handed off to a veterinarian, but does not have the veterinary included inside of the company. So there's a hope and a prayer that they're going to be able to attract that veterinarian to do the work and bring it back to them.

We love our program, obviously, because we're leaning heavy because we're already seeing the customers' acceptance way we've been testing it. We're seeing the revenue and margin profile that comes from the business. And where we do have the veterinary included in our closed-loop feel like we can use it to accelerate our growth significantly across it. I think secondly, as more people get into it, it brings more attention to it, which we believe accelerates the acceptance of the the acceptance of the various local governing bodies that allow more and more things to be done with telehealth and telemedicine and teletriage, which only helps us generate more revenue and do more.

So as we talked about, we're making three very key investments in our services organization, and it's all about bringing more veterinarian capability there. And one of those is our telehealth platform to be even better prepared as we're seeing it as they a net positive revenue and profit growth vehicle for the company. And I think you'll be excited to see some of the progress we're making and are able to talk about in the next few months as we continue to do more and more in this space as we start to see those results come through. Susan I missed anything?

Susan Sholtis -- President

No. I think the only thing that I would add, David, is that, first of all, our service that we have -- that we rolled out in our partnership is 24/7. So we have capability with all of our pet parents, number one. And then number two, I think, as Cord said, because we have veterinarians, we have the ability to close that loop. And we're permitting where the states are permitting, we can take the video call.

Our veterinarians can then diagnose a problem, they can prescribe a solution. And that really helps us to be able to offer, I think, a more holistic solution on our end. I do want to let you know that we are testing quite a few features in order to understand what works and to be able to optimize that. But today, we do charge that parents for a telemedicine visit.

David Westenberg -- Guggenheim Securities -- Analyst

Okay. And then maybe just last one in terms of -- I know you're not giving guidance here, but there's an unusual stocking order in Q2 and then an unwind of that do you feel that everything has been kind of unwinded one here and Q4 next year is going to go back to normal product pacing? I'm sorry if I missed that, if you answered that already.

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

Yes, we didn't answer that yet, David. I think we've put together a very solid budget we always have. And we've looked at the consumption side through the register and through our various customers more even than we've looked at the order basis replaced in 2020 because it was such an abnormal order in year due to the impact of COVID on the veterinarian channel and just how volume shifted around.

But when we looked at the item level consumption, look at the roll up, look at the wins that we've had through our various line reviews, the various planning we do to continue to lean in on the things, look at the growth rates across all the aspects of our business and what we believe is sustainable. We have put together a plan that puts us in a place where we can't give formal guidance for next year because of the uncertainty of some of the COVID impacts.

But like I said, the product business, we feel very solid, will return to more of a normal cadence of seasonality and normal cadence of ordering and consumption, and we'll see that growth in our internal budget without the service organization, having the absence impact from COVID continuing, we have a top line number that we believe we're going to be measuring ourselves against. It's going to be up around $950 million of sales. And we'll be above $100 million of adjusted EBITDA for next year.

So we have a very solid plan for next year. That's not formal guidance, but that's internally what we'll be measured ourselves against and what we'll be talking about as we look at this COVID starts to normalize, and we're able to show normalized operations, normalized seasonality, normalized consumption. But we feel very good about our analytics and about our ability to go out and deliver a very strong year next year.

David Westenberg -- Guggenheim Securities -- Analyst

All right, thank you so much.

Operator

Thank you, and I will now turn it back to management for closing remarks.

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

Just want to thank everybody for joining us this evening. And so listening to our Q3 results. As we say, as we started the call, we've seen some very abnormal cadence and seasonality in consumption this year with COVID-19. And obviously, we've seen a significant amount of impact as we've had to close our stores, keep our employees and their families fed and how as we've gone through this together as a family and prepare ourselves to be a stronger company.

But I do want everyone to understand is we watch very closely the metrics of our business, our clinics that are operating are operating with the metrics, the returns of the profitable margin contributions we're used to seeing and the EBITDA contributions that we would expect to have in the future for the company. And our product business has seen all the things we'd expect to see is the Capstar business is starting to be absorbed with the margin expansion, the incremental growth that it goes through at those margins and ultimately, the profitability for the business.

And so as we really talk about how optimistic we are as a management team, it's because we do have our fingers on all the various details that we're seeing get healthier every day and we know what that means for our delivering results in the future and expect to have a very strong 2021 and beyond as we do that, and just thank our employees, our teams, our shareholders, and everybody that's been with us through all this, and we plan to work harder than ever to continue to get back to those levels as fast as we can. So thank you very much, and we look forward to interacting with all of you very soon. Thank you.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

John Newland -- Chief Financial Officer

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

Susan Sholtis -- President

Jon Anderson -- William Blair -- Analyst

Steph Wissink -- Jefferies -- Analyst

Bill Chapell -- Truist Securities -- Analyst

David Westenberg -- Guggenheim Securities -- Analyst

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