Innovator Laddered Allocation Power Buffer ETF
Q1 2016 Earnings Call Transcript

Published: 11 May 2016

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Blue Buffalo 2016 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to the CFO of Blue Buffalo, Mike Nathenson. Mr. Nathenson, you may begin.

[Mike Nathenson:]

Good afternoon, everyone, and welcome to Blue Buffalo's Q1 earnings call. Some reminders before we start. Today's conference call will include forward-looking statements. These statements are made on the basis of our views and assumptions as of this time and are not guarantees of future performance. Actual events or results may differ materially from these statements. For information about certain factors that could cause such differences, investors should refer to our Form 10-K which was recently filed with the SEC and available on our Web site, including the information set forth under the captions Risk Factors and Statement Regarding Forward-Looking Disclosures, except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In today's discussion, revenue and sales refer to net sales. In our discussion, we will also refer to non-GAAP financial measures, which differ from our results prepared in accordance with GAAP. We will refer to adjusted EBITDA, adjusted net income, and adjusted EPS, which exclude the costs associated with litigation and our initial public offering. Adjusted EPS will refer to adjusted diluted EPS. A full reconciliation with the corresponding GAAP measures is included in the press release, and is posted on our IR Web site at ir.bluebuffalo.com. On today's call, I'm joined by our Chief Executive Officer, Kurt Schmidt; and our President and Chief Operating Officer, Billy Bishop. With that, let me turn it over to Kurt.

[Kurt Schmidt:]

Thanks Mike. First, I too would like to welcome everyone to our call. We're pleased to share our results with you today. As you saw in our press release Blue Buffalo is off to great start this year. Now let's look at the highlight, we grew our revenue 12.5% for the quarter driven by a double-digit increase in volume. Our growth was well above the market and as a result we gained share. We continue to grow in the rapidly growing underpenetrated channels like e-commerce and farm and feed while continuing to build our business in pet superstores and in neighborhood pet stores. We expanded our margins due to supply chain performance and modest pricing. And on the bottom-line when you combine our double-digit top-line performance with expanded gross margins, we're able to continue to invest in the foundation for future growth and still delivered healthy net income and EPS growth. Our top-line performance was a direct result of our continued execution against our unique go-to-market model that's built on our three planks; education, product innovation, and investment in highly effective communication behind each of our major product line. This quarter we continued to invest in our in-store pet detective. We believe these pet passionate representatives are a key component to educating, building relationships and increasing satisfaction with pet parents all across the country. On the innovation front, we launched several new items in our wilderness line as well as our next wave of clinically proven innovation for the veterinary channel. We're continuing to build our infrastructure and distribution in our new international markets in Japan and Mexico. Finally, we continue to invest in brand communication as each one of our product lines received that's owned dedicated TV advertising and marketing support. Now I want to spend a moment looking at the market dynamics and our sell-through at retail. For Q1, we estimate the overall U.S. pet food market experience low single-digit growth. This compares to Blue's low double-digit growth in consumer takeaway, which resulted in continued share gain. Consistent with our expectations, our consumer takeaway grew in the mid single-digits in pet superstores and about 30% outside of pet superstores. Our rapid growth in these channels is driven by the underlying momentum of the channels themselves as well as our rapid share gain. Now let's dive into tour business outside of pet superstores. Among these accounts, we saw robust double-digit growth in our brick-and-mortar stores these include regional and neighborhood pet stores and farm and feed stores. Our performance in these channels reflects the runway we have ahead of us and as we continue to increase our velocity, broaden our assortment and enter new locations particularly on the farm and feed side. On the e-commerce side, we're gaining share by leveraging our competitive advantage in a channel that allows us to close our convenience gap against FDM and gain share in the $27 billion U.S. pet food market. As a reminder, over 50% of the dollars and over two-thirds of the volume is still sold through FDM, so we believe we continue to have tremendous headroom to move pet parents from shopping in FDM to the specialty channels where we sell Blue. I am also pleased with our supply chain team as they continue to produce great results and drive our new capital project that will deliver productivity, flexibility and future innovation. We're making good progress on the capital projects we announced last quarter. And I am pleased to say that we have secured a site in Indiana for our new Greenfield manufacturing plant and R&D facilities and our engineering work is well underway. In a few minutes, Mike will get into more details of our strong financial performance in the quarter, but first let me turn it over the Billy who will provide some additional color on our commercial performance.

[Billy Bishop:]

Thanks Kurt. As Kurt mentioned, the Buff is off to a strong start in 2016. All of our product lines contributed to growth with wilderness leading the pack and we are pleased to report that innovation was a key component to both our dry and wet foods, treats and other performance. In Q1, we launched 16 new items in the wilderness product line including both dog food and treats and two new original recipes, Bayou Blend and Denali Dinner. Bayou Blend contains alligator, catfish, and shrimp. And Denali Dinner contains wild salmon, venison and halibut. For each of these new recipes we offer both a trial size and a large bag of dry dog food, a can of wet food and a crunchy treat. We also launched wilderness wild roles which is our entry into the meat role category. Wild roles come in four flavors and two sizes and are shelf stable and they're also free of any artificial preservatives. Our innovation reflects the continued humanization of pets and the premiumisation of the category. And our approach to innovation is to keep driving our core dry business and also lean forward by concentrating additional R&D focus on wet foods, treats and other products where we are underpenetrated. We also continued introduce new products in the veterinary channel under our natural veterinary diet product line. Recent product launches include a multi-benefit weight and urinary product for both dogs and cats. These products are clinically proven for both weight and body fat loss in dogs and cats. We've taken a science-driven approach to these products and they are backed by clinical studies which demonstrate the benefits provided to both dogs and cats. Looking forward, we will continue to launch new waves of natural clinically proven therapeutic products, we're gaining traction on some important initiatives and we continue to be excited about the size of the prize. Turning to supply chain, our gross margin performance reflected improved productivity as we lapped the Heartland startup cost from 2015 as well as a tailwind from lower input costs. Now, I would like to pass it onto Mike for a closer look at the financials.

[Mike Nathenson:]

Thanks Billy. Our net sales growth in the quarter was 12.5% driven principally by 10% volume growth versus last year. Beyond volume growth, net pricing contributed 160 basis points and better overall mix contributed 90 basis points. As we expected, the growth was balanced as dry foods grew at 12.4% and wet foods, treats and other products grew at 13.1%. Before I talk through the rest of the P&L, I'd like to touch on our sales growth by customer. Overall across our whole business, sell-in and sell-through were fairly balanced. In superstores, pet parents’ sell-through growth was mid single-digits and our sell-in was slightly higher at 6.5%. The difference is driven primarily by the timing of the initial launch of our new innovation, modest increase in superstore inventory as a catch-up from previous quarters and promotional timing. As Billy mentioned, we just launched Bayou Blend and Denali Dinner. Our shipments began in the first quarter and space resets in superstores began towards the end of Q1 and will continue into Q2. Outside of pet superstores, our sales to other customers represented 32.5% of our total sales in the quarter and grew 27.3%. The sell-through to parents in these customers was slightly higher at about 30%. So overall it was fairly balanced across the business. As Billy and Kurt mentioned, we're currently at the early stages of our entry into the veterinary channel and new international markets. As a result, these two areas did not materially contribute to the sales growth in the quarter. We will see modest top-line contribution from these investment areas towards the end of 2016 and we expect to see more meaningful contributions in 2017 and beyond. Now let's turn to the bottom-line and our margins, Q1 adjusted net income was $38 million and adjusted diluted EPS was $0.19 per share which both grew 23%. Our adjusted EBITDA was $68 million, up 20.5% versus last year. Gross margin in the quarter was 44% approximately 400 basis points higher than last year. The increase in gross margin was driven primarily by supply chain efficiencies including the benefits from our Heartland facility and lower input costs. Margins also benefited from modest pricing, positive mix and timing of promotions. Now let's turn to SG&A, excluding the cost associated with our IPO and our litigation related expenses, SG&A grew 27% in the quarter versus last year. The increase was primarily driven by investments in our veterinary and international strategic initiatives as we continue to build our vet detailing force and our international infrastructure. Additionally, we continue to invest in brand building, advertising and marketing programs. A detailed reconciliation of our GAAP and adjusted financials can be found in the attachment to our 8K and press release. Given our strong top-line and bottom line results as well as our capital efficient business model, we continue to produce strong cash flow. For the quarter our operating cash flow defined as cash from operations less CapEx was $41.7 million, our CapEx was $800,000 and at the end of the quarter we had 265 million of cash on our balance sheet. As a remainder, our Q1 operating cash flow was reduced by the $32 million payment for the settlement of the U.S. class action lawsuits. Excluding this payment our operating cash flow would have increased 36%. As you will recall the class action settlement was recorded as a non-cash expense in Q4 of last and was included on our balance sheet as an increase in short-term liabilities. Now in Q1, short-term liabilities were reduced as the cash has been paid. Now let's turn to our guidance, our long-term guidance remains unchanged. We are committed to delivering 10% plus revenue growth and about 20% EPS growth over the next three to five years. Now turning to 2016, as you saw on our press release we have raise the bottom-end of our guidance for both revenue and EPS, we expect our full year net sales to be between $1.125 billion and $1.14 billion with adjusted EPS of $0.73 to $0.74 per share. On our last earnings call in March, we had almost all of the Q1 results under our belt and we let investors know that we were off to a strong start for the year. As a result this strong start was baked into our full year guidance at that time. So the only change we are making is raising the bottom-end of our outlook for the full year which reflects lower expected inventory headwinds. Turning to margins, on a full year basis, we expect our gross margin to be between 43% and 44%. And given this margin outlook we will continue our investments in strategic initiatives and brand building, when you put all this together that’s what delivers EPS of $0.73 to $0.74 per share. Finally for capital expenditures, we expect to spend between $70 million and $80 million for the full year. Now I’ll turn it back over to Kurt.

[Kurt Schmidt:]

Thanks Mike. Before I open it up to questions, let me tell you the five points I’d like everyone to walk away with today. One, we are the competitively advantaged leader and the best part of a great category, wholesome natural in the $70 billion global pet food market. Two, we are off to a strong start to 2016 and we are confident in our 2016 full year outlook. Three, we continue to gain share in faster growing emerging channels even as we continue to grow in pet superstores. Four, we are seeing the benefits of our improved supply chain performance and our expanded gross margin, along with other positive factors Mike walked through. And five, we continue to invest in our strategic initiatives as new legs of growth and the sizes of price is as large as ever. Next we have every reason to be excited about our future as the new breed of CPG Company. With that I’ll open it up to questions.

[Operator:]

Thank you very much Mr. Schmidt. [Operator Instructions] Our first question comes from John Faucher with JPMorgan. Your line is open.

[John Faucher:]

Mike, you talked about the guidance shifting in terms of the inventory changes. Can you give us a handle, especially since we saw shipments ahead of takeaway in pet specialty this quarter, kind of latest outlook for the inventory situation and why you think that is changing?

[Mike Nathenson:]

Well when you think through our guidance, one of the things that we had clearly talked about was the expectation that there would be some headwinds to inventory at our largest customers. As you mentioned in the Q1 call, it was a lot more dynamic, than we had originally expected. And as the quarter progressed, it was clear that our sell-in and sellthrough was fairly balanced across our business. So when you put all that together, when we look through our programs for the rest of the year, our discussions with our customers, we believe our sell-in and sellthrough will be fairly balanced for the rest of the year.

[John Faucher:]

Okay, great. And then just one sort of follow-up on the gross margin, and as you look at it obviously a big step-up year-over-year in the quarter, and then for the guide. How much of this is Heartland coming in better versus the raw material favorability, particularly as you look and try to map out sort of a sustainability of some of the gross margin expansion as we go into 2017?

[Kurt Schmidt:]

Sure, there were several factors that drove the improvement in our gross margin and the biggest factor as we talked about on the call was the more favorable supply chain cost, that included the lapping of the Heartland startup cost from last year as well as the tailwind from input cost. The larger portion of that was obviously the lapping of the Heartland cost from last year. In addition we implemented some modest pricing as we talked about earlier at the beginning of Q1 and mix was also positive. So part of the benefit in the quarter was the timing of our innovation and as you know it takes a little time to get all the shelves reset across all the stores. The reset started at the end of the quarter and continued into Q2. And then in addition there were some promotional timing that benefitted us in Q1 but we will be a bit of a headwind in subsequent quarters.

[Operator:]

Thank you. And our next question comes from David Driscoll with Citi Group. Your line is open.

[David Driscoll:]

Mike, on the second quarter for revenue growth, can you just talk about what are the impacts from the first quarter's -- it sounds like you are clear that shipments were a little ahead of consumption and I am guessing from the numbers you gave in your script -- you kind of did it fast there. So if I missed this -- but it sounded like it was about a point, maybe of shipments versus consumption. So, would that come out of the second quarter number or is it just kind of filtered through the remaining three quarters?

[Mike Nathenson:]

We were balanced across all of our business, so what we saw was that, we saw a little bit of shipments ahead of consumption in superstores and you know you’re a very good analytical person, so that is true but also what we saw outside of pet superstores that our pet parent takeaway was higher than our shipments in. So when you put all that together, it fairly balanced across the business.

[David Driscoll:]

On SG&A, so there is a big increase in SG&A as a percent of sales year-over-year. What kind of run rate are you at right now? What kind of investment do you need to make kind of going forward? Is the first quarter's SG&A as a percent of sales is that a good figure to use for the rest of the year and maybe in subsequent years? Or are we at, like, an unusually high level?

[Kurt Schmidt:]

No I think, when you look at our guidance, one of the things that we added to the guidance was to obviously make sure everybody was anchored at the top-line, when you saw that we raised the bottom-end of our guidance. We also gave some indications of our gross margins to help people understand that our gross margin was going to be between 43% and 44%. So when you do the squeeze math between that and our EPS of $0.73 to $0.74 that should give you a pretty solid indication of our SG&A. So hopefully that helps to get you there.

[David Driscoll:]

And just one last question for me on the -- just a general specialty environment, one of your competitors noted, you know, they -- “a slowdown” in the pet specialty channel, excluding e-commerce. Could you guys just make a comment on that one, and then maybe how does e-commerce kind of fit in and maybe I am really trying to ask here on how significant is the channel shifting, moving?

[Kurt Schmidt:]

Yes this is Kurt, David, you know we saw robust growth in the first quarter, it was about 3% for the total category, five of that was the specialty channel, 1% was in FMD, so as you look at it, we still see to continue category meeting expectations, so if you think about it, pet stores are growing middle single-digit Farm and Feed is middle single-digits to high single-digits. Vet is also growing the same middle single-digit to high single-digit and e-commerce is growing at double-digit, so we think again you look at, at the category growth dynamics are still we think very good.

[Operator:]

Thank you. And our next question comes from Andrew Lazar with Barclays. Your line is open.

[Andrew Lazar:]

I am curious. Does the full year guidance still embed mid single-digit growth takeaway in superstores? I think you discussed that on the fourth quarter call?

[Kurt Schmidt:]

It does, so you know still our outlook for pet superstores is that still same mid single-digit take away.

[Andrew Lazar:]

And that's important, because I guess as a lot of folks have discussed, some of the monthly takeaway data in pet superstores seemed to have kind of slowed a bit sequentially as the quarter unfolded. So, I am just trying to get a sense there of do you think we are at sort of a baseline of growth there at this point in what causes the channel to maybe accelerate moving forward? Or, are we not at a point yet where we have seen, I guess, the bottom in terms of where that growth number can move?

[Billy Bishop:]

Hi Andrew it’s Billy I just want to give you some color at least from our prospective here on the GfK data, GfK externally reports only combined pet store data to you guys and Blue gets much more detailed data that we can reconcile internally, within GfK’s pet store data, there is superstores scan data is accurate but their pet store data outside of superstores is self reporting and subject to samplings errors and have some structural issues. So in addition, as I think we all know GfK doesn’t cover our sales in fast growing channels like e-com and Farm and Feed. So when you put all that together, it’s not realistic for them to be able to provide actually reporting or projections on our growth.

[Andrew Lazar:]

And one last one is just you noted some of the shelf resets going on in pet superstores toward the end of the quarter and the beginning of the second. I guess any interesting takeaways there from a Blue perspective, or the competitive environment in which you are operating in terms of how the shelf resets have laid out for you versus some of the key folks that have been gaining share on some innovation in some of those superstores and things along those lines? Thank you.

[Billy Bishop:]

Thanks Andrew, no we’re not seeing anything really that has changed drastically or impacts us at all.

[Operator:]

Thank you. And our next question comes from John Baumgartner with Wells Fargo. Your line is open.

[John Baumgartner:]

I would like to ask about the brand building, in that I think just slated for the full year, it sounds as though from reconciling the gross margin guidance with the implied SG&A, it sounds like maybe you're accelerating your brand building a bit relative to the guidance for March. So I guess first off, is my understanding there correct? And if so, is there any specific initiative that you're kind of putting that behind?

[Mike Nathenson:]

Hi John, this is Mike. So, as we look at our strong gross margins, we’re continuing to invest behind our business across the board at the appropriate levels, so and that is both in our core business as well as our strategic initiatives. So, given the strong returns we’re seeing from our brand building efforts, we’re going to continue to invest in our three strategic planks. So, as we’ve discussed earlier, we’re going to continue to ramp-up our spending in those strategic initiatives.

[John Baumgartner:]

Okay. And then just in terms of the acceleration of the growth in the Wet and Treats business in the quarter, can you speak to how much of that was actually driven by the wet business? And then I guess specifically, how much of it was driven by new distribution, relative to maybe an accelerating return on your prior investments there?

[Billy Bishop:]

John, it's Billy we don’t disclose that level of detail as it relates to Wet, Treat, and other. What I can tell you though is our new innovation in our Wet foods treats and Meat Rolls contributed as well as we had a more balanced promotional plan, which included some really good merchandising. We’re encouraged with our performance early on, but we still -- we know we still have some work to do. So net-net, really, we had a balance across all of our Wet, Treat, and other products from a growth standpoint.

[John Baumgartner:]

Is it fair to think that Q1's growth rate for that business is more or less sustainable going forward?

[Billy Bishop:]

As I mentioned on previous calls, we’re off to a good start, but I think we do have some areas that we got to continue to focusing on to deliver the growth that we expect, that includes product innovation and we’re excited about the innovation pipeline we have in this area. We’re going to continue to enhance our communication and marketing efforts as most pet parents now are learning the differences between engineered and wholesome natural products from a dry food standpoint, but we still feel we have a big opportunity to educate them on the Wet, Treat, and other, natural alternatives if you will. Also distribution, we have some opportunity there. We’re outside of pet superstores. We’re underpenetrated. And then finally promotions as I’ve mentioned in the past we believe we have an opportunity to be smarter about our promotions and really expand our share of stomach in Wet, Treat, and other.

[Operator:]

Thank you. And our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

[Dara Mohsenian:]

So top-line growth continues to be very strong outside the pet superstore channel with the 30% retail sellthrough in the quarter. How sustainable do you think that is as you look out to the balance of the year? And particularly, I'm wondering given the comp with Amazon and e-commerce in the middle of the year. And then on e-commerce, how much was that business as a percent of sales in the quarter this year? How does that compare versus last year? And any thoughts you have on how much of that e-commerce growth is incremental versus cannibalistic to the rest of your portfolio would also be very helpful?

[Kurt Schmidt:]

I’ll kick it off. And this is Kurt. And I’ll let Billy make some comments on it. We’re just getting started here. So this industry remains dynamic and is growing well. So, just a couple of points I’d like to make. Our non-superstore sales are mostly growing in three distinct channels. Remember the regional neighborhood pet stores are growing mid single-digits and Blue is underpenetrated and we’re gaining share there. Then there is farm and feed we talked about, that channel is growing at mid to high single-digits and Blue is under-penetrating gaining share there as well. It's very incremental. It addresses really a distinct consumer segment. Historically, we’ve had a lower penetration of premium products in farm and feed and natural pet food. So, typically we’ve had smaller pet food sets and these look for carrying really the fastest growing and the biggest brands. In fact we’ve just had an expansion in TSC this year. And then the third area we have talked about is ecommerce and that channel is growing in the teens, and Blue is gaining share rapidly there. And we view it as a way to close the convenience gap, the food, drug, and mass. And I’d just remind everybody that 70% of the volume is in food, drug and mass and we’re only speeding 3% of pet. So if you think about the opportunity for growth in the channel, it's great and you think about the opportunity for growth with Blue, it's even better. So I think it's quite sustainable. Billy, I don’t know if you want to add anything to that?

[Billy Bishop:]

Yes, K the only thing I would throw out there Dara is we have one nice fact that we’re seeing within our business in e-comm it also over-indexes to puppies and kittens, so we think this suggests that we have new incremental pet parents that are also embracing the online shopping for pet food but consistent our online trends in other categories. So we feel that’s a nice little indicator that again we’re not cannibalizing any of our current business.

[Dara Mohsenian:]

Okay. And do you have a percent mix for e-comm this quarter versus last year?

[Mike Nathenson:]

Hi Dara, it's Mike. If you recall on our Q4 call from earlier this year, we disclosed that the e-comm business was high single-digits of our business in the quarter, and it has continued to be one of the leading channels of growth for us this year.

[Operator:]

Thank you. And our next question comes from Bill Schmitz with Deutsche Bank. Your line is open.

[Bill Schmitz:]

I will be consistent with my first one. I know it is going to be in the 10-Q. But, can you just break down the percentage of sales in Petco and PetSmart individually?

[Mike Nathenson:]

In total superstores were 67.5% of our total business and it breaks down around two-thirds PetSmart and one-third Petco.

[Bill Schmitz:]

Okay, great. And then can you just talk about like what the overall strategy is in both pet and international because I appreciate you are spending a lot ahead of the consumption, but it seems like there's not going to really have it in -- a material impact on the business until the end of the year. So how does that thing play out? In terms of calling on the vets and ultimately closing the sale?

[Kurt Schmidt:]

Yes this is Kurt. Listen we're very pleased with the way we're going right now. Organizationally we're right on-track as we're building that group as we said before. We won't see the SG&A operating leverage till 2018 as we start to build this organization. We entered with very few products we were going to build that pipeline over the first 18 to 24 months. And the good news is that the number of clinics ordering our products continues to grow as well as the number of clinics with repeat orders, and our sales have been growing week-over-week and month-over-month. And over the next 18 months as we introduce the next wave of clinically proven products such as our recent launches of the G.I. products for dogs and our WU product, which is weight and urinary management for dogs and cats, we expect our momentum to continue to strengthen.

[Bill Schmitz:]

Okay, that's really helpful. And then just one last one, and I know in the past you said you never explore going into the mass channel. But, if I look at that channel, it seems like the only growth there is from wholesome natural knockoffs and Rachael Ray nutrition. So that business is growing 38%, 52 weeks, 12 weeks four weeks. So it seems like there is an unmet need in the channel. But you guys ever revisit entering there?

[Kurt Schmidt:]

This is Kurt again. I think a couple things first of all again I want to remind you of e-commence which is the great leveler to FDM. As I often used the example, you can order Blue Buffalo as quick in Fairbanks Alaska as you can in Manhattan. It is a great leveler. You see it in the growth we have, our product is exceptionally well poised for that. So I think the level of growth and the opportunity to leverage the three planks we're nowhere near close to the end on that. And I would say the last thing, it's just helping pushing people towards wanting to be in the natural category and again we think our strength is those three planks, the breadth of our products and portfolio and the experience we give the consumer. So anything that's good for the wholesome natural category is good for Blue.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Joe Edelstein with Stephens. Your line is open.

[John Campbell:]

This is actually John on for Joe. I wanted to ask first on the SG&A, can you quickly just breakdown the difference between the brand building and marketing versus strategic initiatives mainly like pet detective like what was the big difference?

[Mike Nathenson:]

I think as we mentioned on some of our previous calls, we don't split out and go into that level of detail for our SG&A. And I'm sure you can appreciate the considerations including and providing too much info for our competition, but rest assured we continue to pursue and invest behind these initiatives enthusiastically. And just as a quick reminder, we manage our SG&A, right, the first bucket is our overhead bucket so those are finance, IT, accounting, HR. I mean those are the kind of buckets that you should expect to grow around with inflation. And then you have our demand driving SG&A, so that's advertising marketing, pet detectives, R&D and you should expect those to grow largely with our top-line. And then we are investing ahead of scale and ahead of the curve in our strategic initiatives, so from that standpoint as we've continued to say for those strategic initiatives for the vet and our international businesses, we're investing ahead of our scale and ahead of the curve for both of those initiatives. So in total when you look at our SG&A as Kurt mentioned earlier, you will expect -- we expect to see leverage in our SG&A beginning around 2018.

[John Campbell:]

Yes okay. And I guess in a roundabout way, it brings me to my follow-up, which is given the strong growth in the e-commerce is there any worry that the prices online which are advertised well below the in-store prices of the pet superstores are kind of looking forward can be considered a relationship strain or maybe your customer will stop going there given that the lower prices online or just how do you think about the marketing efforts in just the entire initiative?

[Billy Bishop:]

Hi John it is Billy, first I just want to remind everybody that our supersite partners are major players in e-commerce and then secondly we are not trying to pick a winner in this channel we partner with all of our e-retailers to help them grow overall ecommerce business. To your question on pricing we don’t set the prices our retail partners do, each channel has its own unique characteristics and they make their decisions based on what they think is best for their customers and themselves so again we want to support all of our ecommerce partners in making sure that we have a consistent Blue branded message across all platforms.

[Mike Nathenson:]

Hi this is Mike, the one thing I would add here is that we're margin agnostic on whether our products are sold through e-commerce or through brick and mortar.

[Kurt Schmidt:]

And again Billy, this is Kurt. Billy alluded to the puppy and kitten acquisition reflecting incrementality of this. And again I'll say it again it’s a great leveler with the FDM side.

[Operator:]

And I'm showing no further questions at this time. Mr. Schmidt I would now like to turn the conference back to you.

[Kurt Schmidt:]

Thank you to everyone. And we look forward to talking to you again when we report our Q2 results. I want to take this time also to thank the herd members around the world for making things happen. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.