Q3 2019 Earnings Call
Greetings and welcome to the Freshpet Inc. third quarter 2019 earnings conference call.
So I'm all participants are in listen only mode of course, you didn't answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Katie Turner with RCR. Thank you Mr. you may begin.
Thank you good afternoon, and welcome to Freshpet third quarter 2019 earnings conference call and webcast.
Today's call or Billy Cyr, Chief Executive Officer, and because our Chief Financial Officer, Scott Morris Chief Operating Officer will also be available for Q.
Before I begin please remember that during the course of this call management may make forward looking statements within the meaning of the federal Securities laws.
So based on management's current expectations and beliefs.
Risks and uncertainties that could cause actual results to differ materially no describing these forward looking statements. Please refer to the company's annual report on Form 10-K filed with the Securities Exchange Commission and the company's press release issued today for a detailed discussions are there with that could cause actual results could differ materially from those expressed or implied.
Any forward looking statements made today.
Please note that on today's call management will refer to certain non-GAAP financial measures <unk> EBITDA and adjusted EBITDA among others. Although comedy believes these non-GAAP financial measures provide useful information for investors. The puts and takes out. This information is not intended to be considered in isolation or the substitute the financial information presented in accordance with gap.
Please refer today's press release for a reconciliation of the non-GAAP financial measures. The most comparable measures prepared in accordance with gas.
Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call.
Second question can be found in the company's investor website.
Managements commentary will not typically refer to the presentation rather just some recent results they will discuss today.
I like to turn the call over to Billy Cyr, Chief Executive Officer.
Thank you Katy and good afternoon, everyone to begin I will provide an overview of our financial highlights and recent business performance and then <expletive> will provide greater detail on our financial results.
Finally, <expletive> Scott and I will be available to answer your questions. We're very pleased with our third quarter results. We continued the topline momentum we've been delivering since we began our feet. The growth plan almost three years ago bounce back from the adjusted gross margin dip we experienced in Q2 and demonstrated the strong bottom line.
Growth potential that comes with added scale.
That is the essence of our strategy and it is working we've created a virtuous cycle, where increased advertising drives increased velocity, which drives increased distribution and that provides the added scale to both reinvest in the business and to also strengthen our bottom line.
Our strategy is also working for pets and the pet parents, who care for them. We're now producing pet food for more than 3 million households, and that number keeps growing pet parents continue to right and call us to tell us about the amazing differences that freshpet makes in their pets lives. We firmly believe that we're just scratching the surface.
So the opportunity to change the pet food category, enabling pet parents to provide fresh healthy less processed food designed for pets.
In the third quarter, we delivered particularly strong topline growth of 20% and this was on top of 27% growth in the year ago corridor.
This was our eighth consecutive quarter of growth in excess of 20% and seven of those quarters have had growth in excess of 25%.
The growth was driven by continued strong consumption gains generated by the expanded household penetration we delivered in Q2 and again in Q3.
Hi, Good channel Nielsen measured consumption was up 25% behind 34% growth and grocery 25% growth in math, and 11% growth and big box Pat.
Same store sales velocity grew 14% and accounted for more than 60% of the year over year growth.
Our core dog business, which is the some of our dog roles roasted meals and fresh from the kitchen main meal items and accounts for more than 90% of our business was up 31% in the quarter.
Our small but rapidly growing e-commerce business, which includes curbside programs with our key customers home delivery via services like Instacart and shipped and fresh ecommerce like Amazon Prime now and fresh direct was up 93% versus year ago, and now accounts for 2.5% of our business.
More than 85% of that business went through our in store Fridge network.
Adjusted EBITDA in the quarter was 12.0 million up 5.3 million or 78% versus year ago. As we demonstrated the significant leverage we get from scale, particularly in SGN Hey.
This indicates that we have reached an inflection point, where we are able to generate adjusted EBITDA growth in excess of net sales growth.
You'll recall that we set five strategic objectives for 2019, we made good progress against each of our goals.
Our specific progress against those goals includes.
One expand the Freshpet consumer franchise.
Clearly, our new advertising message and product innovations are working as we delivered a very strong household penetration gains in the quarter.
Total household penetration was up 21% persons your go to 2.4 or 5% and the buying rate increased 4%.
Our core dog household penetration was up 31% versus year ago to 1.89%.
As expected the rapid influx of new buyers limited the core dog buying great growth, which was flat versus year ago.
As those new users mature, we expect to see continued increases in the buying rate.
This data shows the effectiveness of our advertising at building, a bigger and more loyal consumer franchise, even in the face of the price increases we took in February .
And there are many more consumers, who look very similar to the consumers. When we have already attracted so the future growth potential it's very robust.
We will provide more insight on the growth of the total addressable market early next year.
Second strengthen freshpets retail presence.
The strong first half momentum with retailers continued into the second half with another strong quarter of new stores upgrades and second fridges that drove our ACB distribution to a new high.
We added 365 net new stores in Q3, bringing our year to date increased to 1200 80, net new stores and our total store count to 20779.
We upgraded another 170 sore 74 stores from small or medium fridges, two large bridges in the quarter, bringing our total upgrades year to date to 537 versus the 695, we need to hit our target of 1500 upgrades. Since we started the program last year.
And we added a second fridge to another 31 stores, bringing our total number of stores with two or more fridges to 778 stores.
<unk> distribution grew 9% EUR 4.3 points, our biggest increase since 2016% to 49.4% and Pdps grew 9%.
It is very clear that retailers are responding to our two plus years, a strong growth and the Freshpet is now achieving a level scale work and had a meaningful impact on their total category growth.
This is also evident that our feed the growth productivity loop were increased advertising investment drives increased velocity and that drives increased distribution is working as intended.
As a result, we're delivering our strongest distribution gains in several years.
In the near term that will dilute our velocity gains.
But longer term it produces strong sustained net sales growth supports a broader consumer franchise. It makes it easier for consumers to find freshpet and the specific item. They won in the store if their choice.
We have a deep pipeline of new distribution opportunities and second fridges that are queued up for late this year and early next year.
We expect to deliver our annual targets a 1500 to 1600 net new stores. This year a cumulative total of 1500 upgrades. Since we started our upgrade program last year and 800 stores with two or more fridges.
They should result in ACB gains in excess of our long term average ACB distribution growth rate of 7% and GDP growth in excess of 9% during 2019.
Third strengthen adjusted gross margin and adjusted EBITDA margin.
Adjusted gross margin in the quarter was 49.8% up 10 basis points versus the year ago period.
As we indicated on the Q2 earnings call, we successfully resolved the manufacturing issues by the time of the August call, but the issues had bled into the first part of the third quarter.
Our performance since then has been much stronger, enabling us to restore customer service and replenish our customers depleted inventories.
We remain on track to deliver continued improvement in our adjusted gross margins in Q4 as we have now fully implemented each of the elements of our gross margin improvement plan, including price increases higher margin innovations and full utilization of the labor we hired earlier in the year.
We will however at additional labor in Q4 for the start up of our final line on a 24 seven schedule in January .
As we indicated at the end of Q2, we believe that are manufacturing expertise is a critical advantage, we have and we fully intend to continue develop and expand that advantage.
We strive to make it very difficult for a competitor to match our level of mastery afresh pet food manufacturing.
To that end, we announced the hiring of two new top technical talent in August .
Then being them, our new VP of process development, and strategic quality and Willie Everett the general manager of our Midwestern capacity expansion.
Both of them started in late August and we're already seeing the benefits of their efforts.
We also delivered significant gains in SGN, a absorption this quarter, increasing absorption by 320 basis points of adjusted SGN eight excluding media and the corridor and a cumulative 590 basis points versus where we ended 2016.
Year to date, we have gained 360 basis points versus year ago on SGN, a absorption excluding media spending.
We're confident that our plans are on track to deliver our projected goal for both this year and the cumulative total of 700 basis points by 2020.
We also believe that there are additional scale benefits, we can accrue beyond 2020.
Adjusted EBITDA margin was 18.4% up 510 basis points versus year ago.
Year to date adjusted EBITDA margin is up 110 basis points to 8.9%. Despite a significantly higher advertising investment. This year, we expect that March and to grow further in Q4.
Fourth continue measured development in Canada, and the UK.
Our UK and Canadian businesses made steady progress.
We front loaded or advertising investment in each market and have seen consumption growth behind those investments. It is consistent with the growth rates that we see behind media investments in the U.S. and the impact was sustained after the advertising went off the air.
We're now in conversations with key retailers in each market about ways to expand distribution to capture the benefits of the increased awareness.
That is the same virtuous cycle that is where for freshpet in the U.S. and it seems to be working elsewhere.
You will take several laps around that productivity loop to achieve the scale in presence that we have in the U.S., but when it is done we will have created a strong foundation for a highly profitable business in each of those markets and everything we've experienced thus far suggest that both of these markets have the potential to be major contributors to.
Our success once we have both the production capacity and distribution to support the development of a large consumer franchise.
Fifth.
Built capability to support accelerated longer term capacity expansion.
As we've said many times the single biggest limit or to our growth is our ability to add capacity fast enough to keep up with the consumer demand that we know exists for fresh Pat.
We also believe that our skill and expertise and making fresh pet food is a real competitive advantage and we plan to invest to continually expand that advantage that is why we are investing in both facilities and technical talent this year.
The Freshpet kitchens 2.0 on our Bethlem campus is under construction and on track to start up in Q3 of 2020 as planned.
Additionally, we're in negotiations to acquire land for our next incremental capacity at a new site that will create geographic diversity in our supply and distribution system.
And as I indicated earlier, we have already hired the general manager Willie Everett lead the development and startup of that site.
Really is a highly experienced manufacturing leader, who started up facilities before.
He also has the full support of the technical team we have developed over the past few years to assist him and getting that site off the ground and planning is well underway.
He is spending is first year in Bethlehem learning, the Freshpet systems, and culture and will relocate to the side of our new kitchen once we break ground.
At our current growth rates that kitchen, we need to be up and running sometime in 2022, we.
We expect announced the location of that kitchen in Q1 of 2020.
In summary, 2019 is going to be another strong year for freshpet and will position us well to deliver our long term goals and tremendous potential.
Our growth opportunities are abundant and our greatest challenge is to make the right priority choices to ensure that we fully realize our potential and fulfill our mission of providing more pets with fresh all natural foods that enriched their lives and the relationships with their pet parents and doing so in ways that are good for our pets for piece.
<unk> and for our planet.
Before I turn it over to deck I want to let you know that we will be hosting an investor day on the morning of February 25th 2020 in concert with our Q4 2019 earnings release.
That time, we will outline our 2020 plan in guidance provided an update on our capacity expansion plans.
Provide you with an update on the total addressable market for fresh Pat and lay out our post 2020 goals as save the date and invitations will be forthcoming.
Additionally, I want to be sure that all of you saw our announcement in late September that we have added olu back to our board Olu brings a wealth of experience in consumer products in both the U.S. and Western Europe and has deep strategic thinking and financial skills. We're thrilled that she has agreed to join the Freshpet team.
I'll now turn it over to deck to discuss our Q3 financials in more detail and our outlook for 2019.
Thank you Billy and good afternoon, everyone as Bill indicated quarter three net sales were 65.3 million up 28% versus a year ago period.
Keeps us on track to deliver our greater than 244 million sales guidance for the year and puts us within striking distance about 300 million dollar goal in 2020.
As our annualized run rate at the end of quarter three is now $261 million.
If we deliver $244 million net sales in 2019, we'd have to deliver 23% growth in 2020 to achieve out 300 million dollar go.
We believe that is very achievable.
Our continued strong growth is the result of the increase investment we made an advertising earlier this year strong improvements in our retail presence and the continued strength about product innovations.
As you know our advertising investments the single biggest driver of our growth invites consumers to try fresh bat and once they try to repurchase rate is incredibly high while our advertising investment in quarter three was less than the investment we made in each of the first two quarters, we clearly benefited from the both the expanded franchise.
As we built earlier this year and from the investment we made in this quarter.
We invested four and a half million dollars an advertising in quarter three.
Most of which ran the second half of the quarter. We typically don't advertise much in July in early August .
So you've seen historically once the advertising went back on the air how consumption growth increased again, how do we experienced significant gains in household penetration, providing strong momentum as we head into quarter four.
On a portion of this advertising investment was behind the new Awakenings message, we discussed last quarter.
That message in conjunction with their establish letters campaign, it's particularly affected by expanding the appeal of Freshpet.
We are assuming we are seeing a similar impact from advertising in our international markets. All our advertising was also front loaded in those markets. The benefits have sustained since the advertising went off the air and the increase in the run rate is established stores, it's comparable with our U.S. results.
This gives us strong confidence that our model is working and provides the foundation for accelerated growth in both distribution and net sales in those markets next year.
Our customer service levels return to the high Ninetys by the end of the corridor and that has enabled us to replenish customer.
Depleted inventories and reduced out of stocks.
Just hard to say exactly how much that contributed to the quarter, but we believe it added between one and three points of growth about the same amount we lost in quarter two.
At the end of the quota trade inventories were at normal levels in our year to date chip its growth now matches, our you did a consumption growth.
Adjusted gross margin for the quarter was 49.8% up 10, bips from year ago, and 130, bips better than quarter too.
As we indicated our quarter two calls some of the production issues, we hadn't coded to did impact the first part of quarter three.
What were resolved those issues that are now operating well we had a record.
Throughput in the quarter greatly reduced our scrapped and produce consistently high quality product, we still have opportunities for improvement and we're working on them, but we feel good about the progress we have made.
Additionally, all three elements of our adjusted gross margin improvement plan country to possibly in the quarter and we believe we were on track to deliver a 50% aggressive adjusted gross margin for the year.
That requires that we delivered adjusted gross margins slightly above 51% in quarter, four and we're on track to deliver that.
Looking forward, we will be taking our fourth line to a full 24 seven operation in January it has already begun hiring the necessary employees to support that production.
We have also hired a small portion of the employees will need to start kitchens 2.0 in quarter three of next year.
We will provide investors with a clear picture of the timing of that started up and the onetime costs associated with it well we outlined our 2020 planned at our Investor day in late February .
Adjusted <unk> SG during the quarter was 20.5 million or 31.4% of net sales and improvement of 510 10 basis points versus a year ago period media spending was flat versus a year ago period. When you exclude media spending SG day improved by 320 basis points versus a year ago.
Year to date, we have delivered 200 basis points as best you know improvement despite having invested 150 basis points more in media that in a year ago to date.
Given that our advertising spending that she'll be comparable as a percentage of sales to last year. We believe we were on track to beat our history. They absorption of goal of 240 basis points. This year and that will position us well to deliver the final 200 basis points of improvement will need next year to deliver a total of 700 basis points of SGT improvement by 2000.
Funny.
This meaningful benefit from scale is an essential part of the virtuous cycle embedded in our feed the growth plan.
Adjusted EBITDA on the quarter was $12 million up 5.3, or 78% from the year ago period. This demonstrates the significant leverage we get from scale is virtually every part of our PD L. showed some meaningful benefit for the scale. We have added since last year.
That is also a good indicator ability to grow adjusted EBITDA in excess of the net sales now that we have achieved a meaningful scale.
From time to time will choose to increase investments to capture incremental growth opportunities, but excluding those opportunities. We expect to continue to generate scale benefits in the P. now expanded adjusted EBITDA margins for the foreseeable future.
Given these strong results we are reiterating the 2019 guidance, we provided at the end of quarter to including delivering net sales greater than 244 million and adjusted EBITDA greater than 29 million.
We grew 35 million net of repayments, our credit facility year to date to cover the normal seasonal variations that our cash flow funding of working capital at investment in our kitchen is 2.0.
<unk>, who have invested 21 million of capital against catches two point <unk> 0.0 project. This year and other project designed to increase our capacity and our total spending on those projects year to date is 23 million.
Cash from operations was 13.3 million up 5.3 million the year ago quarter.
We continue to expect to produce positive cash flow from operations each year.
In conclusion 2019 is going to be another strong year for fresh Pat the sustained top line growth is delivering the anticipated financial benefits that will help us realize our financial goals.
And we're doing this while continually investing to improve our operations and build the cup.
Our ability to expand to be future growth.
Those efforts will enable us to fulfill our mission of changing the way people feed their pets to grow company and changing industry is a once in a lifetime opportunity that our team relishes and that opportunity also helps us attracted new employees, we need to support our growth.
With that opportunity comes responsibility, we are working to improve the lives of pets and their families forever.
We need to do it right foot pets for people and for the planet.
That concludes our overview.
We will now be glad to take your questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask your question you May Press star one on your telephone keypad a confirmation tunnel indicate your line is any question Q you May press star too if you would like to remove your question from the Q4 participants using speaker equipment, it maybe necessary to pick up your handset before precedent.
Starkey. Our first question comes from the line of Peter Benedict with Robert W. Baird. Please proceed with your question.
Hi, guys. Thank you for taking my question I think I think you, but you are building what do you guys addresses a little bit, but just want to expand on little bit did just that you know the full year revenue guide it to 44, I know, you're saying at least that number but you know if you did take that number and just you know backed out what you've done it would have fourq revenue.
Below the level you did in Threeq you see it was is that something that you're expecting at least given the the cell and I guess you had in and a lot in Threeq you in order to kind of fill up or something along the under inventory position or some of the retailers were truly refocus kind of on the a greater than 244 part of that guidance.
Yeah first Peter <unk> first of all you know we as we said the Q3 is probably a little bit bigger than what it would have been just because we are doing a catch up from Q2 and if you look at the relationship between Q4 in Q3 last year. There was a small increase in Q4 from Q3, but it's not.
Not a huge piece and part of that because retailers take their inventory down in refrigerated products in the fourth quarter. So you can expect them to be relatively close to each other and I think any any differences splitting hairs. At this point and we also don't want to get in the business of updating our guidance more than you know we did this year with doing at once midyear.
Okay. That's helpful. Thanks, Billy.
And I guess with with the court dog household buying rate kind of stabilizing you spoke to that it reflects kind of the new household you've been adding to your instead of dynamic that.
Persist for the next I don't know you're like how do we think about when when when you think that hook starts to hook backup a in terms of the binary for the core dog households.
I, it's I spent a lot of time on that recently, Peter and when you push the growth rate in the penetration beyond the high Twentys, you'll see the buying rate go flat just because you add so many people so fast, but when that slows down a little bit when the buying rate or the penetration rate grows then.
I see the buying right go up because the people who have been in the franchise are moving up there they're buying higher value products are using the product more frequently. So we are seeing that like you know if we had a metric of stores opened more than a year, we'd see that group continuing to increase their purchases.
Okay. All right now that's great I guess I last questions just the media spend plans, it's normally very light and in Fourq too. So I assume that's continuing to be the plan. This year, but as you think about nexstars, we're bringing on the new capacity I think.
We want to speak to at least generally what you're thinking in terms of how met the media spend and 2020 will compare to 2019 at least as you sit here today.
No we're not ready to do that yet because we're still trying to figure out exactly when our capacity is going to come online. That's what we'll talk about at our Investor day at the end of February because by then we should be under roof on our on our new kitchens, 2.0, and we'll be able to have a much firmer idea of what when that the capacity will come online [laughter].
Okay, I know it fair enough Philly thanks, so much.
Yep.
Our next question comes from the line of Robert Moskow with Credit Suisse Credit Suisse. Please proceed with your question.
Hi, Thank you.
Maybe if you brought it you've made a number of public in the past Billy but is there a penetration rate that you really are targeting in the medium or longer term I mean, it it sounds like it just kinda checks forward every single year, 2% is obviously very low how do you think about how big that should be.
Yeah, if you if you've seen in the investor deck that we put out in each of the quarters. I think we have a chart in there that shortage shows how media spend over time and household penetration tend to track together and <unk>, we use it as the I. I measure are using that deck that we put out is a core dog penetrate.
They should number and we show that you know at a you know theoretical 500 million dollar run rate, you're a corridor penetration is around 2.5%.
But the total penetration would be a little higher call that in the 3% range, but frankly, that's the biggest opportunity for us as you said the number is so small and our ability to add them consumers had an incredibly rapid rate just points to the significant opportunity that we see the correlation of advertising spend two household penetration gains continues to grow <unk> and it.
Actually is getting stronger and so we see that opportunity just being that is the single best indicator and the single biggest driver of our long term growth potential when we have our investor day at the end of February we will provide an update on the total addressable market and that will be one of the key metrics will talk about is what is that potential.
And as a follow up to that I'd <unk> I've noticed a lot of advertising for home delivery <unk> fresh dog food that looks a lot like yours or maybe you've talked about this in the past, but do you have a sense of what kind of penetration rate those competing brands have there's probably more than one and do.
Do you expect do you think that that is your.
<unk> competition or has it as it continues to evolve or do you think it's more like <unk>.
Brick and mortars is your primary competitor.
Its rob so the way we we'd like to think about this is that the way people buy fresh groceries now and into the future is the we will be the primary way they buy their fresh pet food today. If you kind of look at most companies are doing fresh food fresher frozen they're seeing.
Somewhere between two and 3% other total sales being done through online.
Vehicles, or we do know that clicking picks and a handful of these other new vehicles are making a little bit easier for people to do more we're obviously focusing and very interested in what people are doing from a direct to consumer standpoint, and keeping a close eye on that weve, even done some of our own testing and evaluation if that's interesting.
Well well continue to evaluate that.
And see a.
Kind of see how it plays out over the next couple of years right now, it's very small, but it's growing quickly.
Okay, Yeah, I mean <unk> the food itself is very premium positioned it I mean, it it looks even more premium position than yours, but it would seem to me that maybe you could even extend in that type of arena as well if you if you chose to but.
For the Investor Day, Alright, Thank you very much.
Thank you.
Our next question comes from the line of Bill Chappell from Suntrust Robinson Humphrey. Please proceed with your question.
Thanks, Good afternoon.
Bill can you talk a little bit of up pricing both this quarter in minutes, especially as you look to next year and just it seems like.
Starting this time last year, though the whole category took some sizable pricing that's really driven sales growth of the category and as we start to lap that I mean do you see.
<unk> price gaps changing with with your products do you see taking an incremental pricing do you see rolling back Fracing, just kinda kind of the outlook or would you see both for you and the whole category.
Well I'll talk mainly about what a what we're doing on we're thinking earlier. This year, we took a a small price increase we're able to pass it through very effectively two to consumers retailers and consumers kind of Ah you know accepted the price increase and we saw a really no impact.
Study, we were greatly encouraged by that and we think it demonstrates the potential of the of the business overtime to to maybe move more pricing.
That being said the goal that we have as an organization is to continue to increase and go penetration as fast as we possibly can I want to make sure our products or is widely available and picked up and consumed by as many people as often as possible. So want to keep our pricing as low as we possibly can so unless we're seeing a signal.
If we can cost pressures our goal is to keep our pricing really where it is oh, we will take modest pricing overtime, a and we'll continue to kind of put that in a in a cadence it will be very targeted and strategic when we do take that pricing on is very specific items and it will be typically very very low low increases.
But we don't see you don't foresee any any significant pricing in the in the near future from what we're seeing from input costs are ingredients.
Got it and then just on the mix.
Did you or could you couldn't give us better idea of how the a specialty channel Exxon line did and in terms of growth versus first that and also it kinda understanding on the the bags versus roles and it seems like the growth a difference between those two is starting to narrow so that's not having as big of an impact on margins.
But maybe a little more color would be great.
So what we're a from a from a pet specialty basis.
We're seeing about 11% increase this is kind of Nielsen data, 11% increase for fresh [laughter], we're seeing them overall the channel down about a minus four.
You know about a 15% gap there its a little less than what we had even planned on going into this year. We believe that a there their traffic continues to be office, a little bit and it touches on a little bit of the impact of the DCM and green free.
Trend that's been going on we believe it's a a component of it its yes, it's definitely impacted us, but keep in mind that pet specialty is about 16% of our total sales I'm, obviously, we'd like it to grow faster than a then then we want all segments growing incredibly fast.
But we've been able to a higher rate growth rates in some of the other channels when you get into bags and rolls. It's it's interesting we've kind of seen roles. There was a period where roles with outgrowing bags that at a point. This year now factor I phone roles, depending on the period, our bags have had a really strong run.
In the last quarter, so from a margin standpoint, the bags are slightly margin dilutive, but moving into our new facility. It will be basically a margin neutral overtime on our bag business.
When we took pricing last year and the pricing we may take in the future will be kind of focused on our bag business in order to to make it a kind of margin neutral if we do see transition from consumers to bags enrolls.
Got it thanks, so much.
Thanks Bill.
Our next question comes from the line of Brian Hoffman with D.A. Davidson and company. Please proceed with your question.
Thanks, Good afternoon.
First question on household penetration.
You know year over year growth accelerated by my math I'm in Q3 versus Q2, you know about two X faster than I was forecasting given the step down in media spend in the second half and so Billy I'm curious if there's anything.
Don't know if its cadence with when the media spend fell in Q2, and so there was some carryover effect from that ramp up and spend in Q2, well if there's anything else you're seeing as far as you know I know we've spoken about the multiplying effect of word of mouth. Once you get to a certain level of brand awareness I'm. Just curious if there's anything you're seeing there and if that if that.
Household penetration number came in and even it maybe a little bit higher than what you guys were forecasting internally.
Brian There are several factors at play clearly, we're very happy with the household penetration gain that we had and we're also very happy with the household penetration game. We had at the end of Q2 that help us quite a bit I would say that there are three factors involved factor number. One is we ran media all the way up to the ended June this year. So there was a carryover effect that happened into into it.
Q3, and then had our normal cadence come on in Q3, so that we had a little bit about benefit from running the media longer in Q2 to help Q3. The second thing that we had a is the new message. So we had a two messages on air our letters campaign as well as what we call awakening, which created a little bit more of a seat of doubt for piece.
Well about why they should consider fresh pet food.
That helped quite a bit that didn't start airing until halfway or two thirds the way through the second quarter and we got the benefit at the end of that quarter, and then again and this quarter and the third thing is or out of stock issue was most pronounced in Q2, particularly if you look at it on a weekly basis in the second or third week of June that's where we had the biggest issue. So we weren't going to be gaining as much as.
The household penetration then as we quit as we restored the availability in in Q3. So now fully in stock we have a very compelling advertising message that ran for the quarter and it's worked incredibly well for us and that's what makes us incredibly bullish about the household potential penetration growth potential. This business is with the right message with the right products and <unk>.
Although with the right distribution, we think the upside and household penetration is very significant.
Thanks, that's a that's helpful color.
Last one for me the EBITDA a number you stuck with the guidance there <unk> <expletive> reiterated the gross margin guidance for the year. It seems like you'd have a fair amount of cushion at this point you know mindful of the magnitude of beat that came through Q3. So just want to double check and make sure is there anything on the I know you've talked.
About adding staff in front of the January a ramp over the last line. So I don't know if that's a factor in here, but anything we should be mindful love in Q4 that might.
Stepped down on the EBITDA.
Well, we accrue incentive comp of based on where we are at the point in time in the year versus our internal budget and as you can see where approximately $16 million against a $29 million a adjusted EBITDA guidance.
So we have a we have a fair amount more in the fourth quarter to accrue on incentive comp.
That.
Uh Huh is yet to be recorded and that's that's one of the elements of a reconciliation between where we are today and greater than 29 million.
Okay that makes a lot of sense. That's perfect. Thanks, guys continued success.
Thanks, Thanks, Brian Frantic huh.
Our next question comes on the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, good evening folks.
And congratulations congrats on a strong quarter, Oh, really really encouraging to see that revenue growth.
Remains robust.
As I said listen to your prepared comments.
And some of the queuing day, Yeah, I hear you talking about the the increasingly strong correlation between advertising and penetration.
I hear you emphasizing penetration growth.
I heard you sort of back off or not talk about.
Your plans for media spend next year, even though there are some numbers you've already put out there and I heard you talk a lot about your or a bit about 2020 in terms of revenue, but unlike last call you didn't really talk a lot about the margin leverage or the EBITDA is harder for 2020. It gives me pause in has any sort of step back and question, whether or not you are rethinking.
That 2020 EBITDA.
As you also rethink the amount of investment you want to continue to put into the business next year is there anything.
It is is that reasonable interpretation.
First of all were not deliberately trying to guide one way or the other related to 2020, where or change anything that we said in the past, but what we what we are want everybody to be mindful of is that a as we get to closer to 2020, and we start looking at what is the potential for this business beyond 2020.
And we will lay that out at the end of February lay out what that guidance looks like we're seeing nothing but the opportunity getting bigger and the single biggest barrier for us in fulfilling that opportunity is having capacity 2020 becomes a tricky year for us because as we continue to grow very quickly we need to bring that capacity online we've got to get it started up.
And be able to feel filled the demand. So as we are as we're thinking about 2020 were trying to use the term we're trying to glide into that capacity and the glide is how much media when do you put the media on air So that you build the business to be as being successful as you can in that sort of tricky balancing year, but theres no doubt that when you get the ended that.
At year end, we have the capacity online we know we have the tools. We know the consumers interested we will invest very heavily beyond 2020 to continue to fulfill the potential of Freshpet. It's just a 2020 is going to be one of those tricky years, where we're bringing on capacity and need to make sure. We don't outstrip the capacity with the marketing investment that we're making.
Billy I thought you had enough capacity to fulfill roughly 350 million a revenue which would be substantially above your 300 million dollar target.
I will face for that.
Yeah. The we have about capacity for it depends on mix, but it's about $300 million in capacity is what we well we've told folks that we have the biggest issue for US is that will run out of bags capacity before you run out rolls capacity and is we talked in a previous question. The bag business has been growing quite nicely. So we need to me.
Sure we get those bag the bag line to come on will run out of that capacity, probably six months or so before we run out of the roles capacity. So it's it's not a what does the total capacity. The facility is what is the capacity on the bags lines. That's the important driver.
That's helpful. That's good context I appreciate that thank you.
Okay.
Our next question comes from the line of Rupesh Parikh with Oppenheimer and company. Please proceed with your question.
Good afternoon, and thanks for taking my question.
So as we look out I guess, a fridges for 2020 years curious if you have any early reads in terms of what is looking like for next year and then you know I've. Obviously you are added capacity constrained 2020. So I was curious if you're also going to use fridges as a lever and potentially managing through capacity for next year.
So we we've had a a really strong year this year, adding fridges and and then obviously growing our HCV. We are really encouraged by the kind of the start of.
At the end of this year and probably the start of next year at this point.
Well definitely use our advertising as a lever to kind of move back and forth to make sure that we are selling every product that we can possibly produce.
The goal is to a you know to make sure that we are driving around the use as much as we can and using our our advertising as a lever to be able to kind of move back and forth to.
To to drive the revenue growth Yeah, we aren't gonna we won't pull back on the fridge is to manage capacity. We would met use the advertising is LIBOR to do that.
Okay, Great and then on the inhibition front, though he just curious how your 2019 innovations I played out so far versus your expectations.
They've they've actually done quite well this year, if we were a little later in innovation, we had a total of six skews.
That we we brought to market. This year, we we look at them kind of net of cannibalization and they have contributed to that the exact read that we anticipated.
There are.
So we're really happy I mean innovation has been like a really core component to our growth over time.
This past year, you know this or 19, we we probably didn't have quite as much innovation as we've had in the past, but they delivered quite well and then next year. We have a handful of new items that were very enthusiastic about that will enable us to continue to to use innovation as a tool to attract new consumers into the franchise.
It's just been one of those kind of core tenets of the business and a one of those keep these we don't just bring innovation to bring innovation, we recognize that it's our fridge that we're taking space away from ourselves.
Cells are very often one of the goals is as we do have second and even third fridges and some retailers that we want to make sure that we are coming with enough innovation to utilize that space as effectively as possible.
Great. Thank you.
Take care of passion.
Our next question comes from the line of Mark After Chan from Stifel. Please proceed with your question.
Thanks, and good afternoon, everyone.
I guess first could you talk a bit about the the percentage of consumers loyal mixer visitors or percent of sales and maybe talk a bit about.
The buying rate for each bucket in the context of the broader commentary that was mentioned before about.
The flat buying rate despite the penetration increase amongst the core dogs.
So so what we typically see is as Oh.
There is a green dependence on dog size and the the buying right.
We see people with smaller dogs being much more loyal and a larger dogs using us a little bit more as a mixer one of the things you'll see us coming from an innovation standpoint over next couple of years is a us working on innovation in order to kind of a due to a little more targeted not only two small dogs, but also even to large dogs. We think that's a that's an opera.
Before us.
I don't think we've actually talked about specific buying rates by dog size. However, I think it's something as we talk about the future potential the organization and the opportunity we have from a penetration growth rate over the next several years, it's something that we will probably share in the February investor presentation, we've done a lot of worker.
On that and we know not only who the consumers are but even better about who the dog. The dog graphics. The makeup of the the dogs in the household and who they are what they're motivated by and what they're buying resource it will probably get into a lot more detail around that I mean that February timeframe, Mark So Ida I'd ask you to be patient with me on that.
Okay, maybe asking than than in a different question.
So what percent of private buyers today are loyal and what's the current repeat rate or at least as of end of Threeq you.
We typically referred to the repeat rate. So we have 'em, we can and this is pretty pretty interesting.
In most package goods. So we have a 70% repeat rate in most package goods you know.
Businesses, when you drive new consumers and you repeat rate goes down we have never actually seen that dynamic it's been quite interesting so with that means within a year, 70% of the people that by Freshpet will repeat on us two or more times.
And we do see typically strong loyalty we have groups are consumers that we followed over time they continue to buy the product year after year on when we do follow those people time, we we actually see them buying more and more overtime.
Maybe mixing more and they may be kind of moving all the way through to buying us exclusively as they're only pet food I.
I think some numbers we have shared in the past is about half of our acquirers are yeah about half of our buyers are.
Yes.
Oh, I'm, sorry, 31% of our buyers.
Represents a 53% of our total dollars on is probably a number that we shared in the past and they spend an average of $167 that data is older I will tell you and as we grow every year and we increase our buying rate that numbers behind some of the data that we see currently yeah, we'll share the more updated version.
And that's because a mark to your question, we don't update that data on a quarterly basis, we look at it sort of the total on a quarterly basis, because it's just it's too fine a cut but we will update it when we have the investor day in February and you'll have a more detailed look at each of the segments then [noise].
Got it Okay and then.
On on the outlook for next year without getting into specific numbers.
You know it would seem like based on your your commentary you're looking at a much stronger first half than second half and less capacity comes online sooner. So I guess the question is 80 of flexibility doesn't sound like it on capacity, but maybe their plan B just in case, you can't get it online as you anticipate and then secondly.
If that rough split is right first half versus second half sales and you are spending less to quote glide into to sales. How do you think about the ability to turned back on the spend to Reaccelerate. The business. What gives you comfort you can do that.
Yeah, So mark I I don't I, just want to leave anyone with the impression that we're going to back off our spend significantly really during any period next year.
We are very fortunate that we do have the advertising and there is a component a component or components of the advertising that has high flexibility. So we are really confident and the numbers that we've shared.
There are very Theres, obviously, many alternative plans that we can basically implement through the year, depending on what our longer term objectives may be.
And we do have kind of a plan b and we even have kind of a plan C from a from a volume standpoint or from a from a capacity standpoint.
So I I when you end up seeing our media spend next year, you're gonna look at it and think and less less were so far ahead of the game you're going to see very consistent spends that you've seen kind of throughout the year and maybe even in this year is a maybe a good example, you see fairly consistent spends that weve as.
As we've done in the past and and if we're way ahead of the game. We me back off some of those spend slightly and use that advertising as a little bit of a throttle <unk> I want to reinforce two points. One is the b connection between advertising spend in volume is incredibly tight for us. So once we have a really concrete idea.
When that plant is going to come up and running that gives us the ability to lay in the spending and we have a base plan that we know what it looks like we know how matches how it matches up with the capacity we feel very good about that plan, but you know where we have a lot of deal going up and we want to make sure. We're under roof before we make that determination and that's the second point, which is we're making very good progress anybody who do.
Rise by can see a lot of steel going up on our on our off facility in Bethlehem and we feel confident that we'll be able to get that up and running we just need to know that we've taken the weather risk out of the out of the process and you know in the next two months, we'll be able to do that.
Got it and just one follow up then Scott So your plan B.C. comment.
Does that mean, then there isn't necessarily capacity constraint next year I'm a big confused.
There is there is obviously, there's some high end capacity constraint.
We put a plan into place that will will allow us to have a little bit more flexibility. Then then we would if we had not done that.
And so it won't be comes down to the mix issue that I think that we mentioned earlier.
Really comes down to bag availability at this point and what we've done as we've been working on for over six months, maybe up to eight months, where we kind of have put a plan b in well, which will give us a little bit more flexibility.
Have a little bit more back capacity.
So we and we've been very kind of thoughtful and cautious around that.
But that's a it's put us in a in a much more flexible position what we didn't want to do as have the facility come up later in the year not have capacity earlier on and then be rushing to make the number for the year. This this affords us the ability to kind of have build use the term glide I think it's a really good too.
From for next year, we're going to be able to really wide and have a much more even cadence to the growth throughout the year than we would have been able to if we didn't have kind of what I'll call plan B.
Got it okay. Thank you.
Our next question comes on the line of Jon Andersen with William Blair. Please proceed with your question.
Hi, good afternoon everybody.
Oh there.
Most of my questions have been answered it asked and answered maybe a couple of quick ones on the advertising campaigns. You mentioned you know the awakening.
That's a relatively new campaign relative to the letter could you just talk about the difference between those two campaigns, the messaging and Ed and.
It was the intense different one to drive household penetration another drive by rate just trying to understand.
That a little bit more.
Yes, so the the focus of our advertising is all of our advertising is very very focused on driving awareness and then eventually you know penetration, we really don't we use our product to help encourage by rate or repeat purchasing.
And we want to make sure that someone's, having an incredible consumer experience day in day out on the product so back to the advertising piece. The spend is really driven to focus on the penetration, we're delivering a slightly different message than we have in the past.
The goal is to obviously educate people on fresh pet food the benefits of fresh pet food the benefits of Freshpet as a company and the work we've done the letters campaign is really kind of a modern day testimony on letters that we have received from consumers. The thing it's been pretty amazing about this business is we thought we had done a really nice job from formulation stamps.
Even in a product concept that we're bringing to market, which is huge fresher less processed ingredients process and as little as possible pasteurized them and keep them refrigerated with no preservatives.
And we as we brought that to market people see an incredible results. So we actually have over 5000 testimonials on our website today and they come in unsolicited, it's pretty amazing and the results we hear about a terrific and that's really inspired the first campaign. We felt we were also now at an opportunity where we could round out our.
Messaging and our communication and what we tried to do is get people to be thoughtful about the food they and how they eat a fresher healthier unless process diet and why would we do something similar for our pets, but obviously you need to feed pets pet food or food formulated for them, but the ideology.
On fresher less process the more natural food. So we actually had worked on it many times, we're trying to get people to reassess the concept of current pet food and maybe there in peak their interest in a in fresh pet food.
And we finally, we're able to break that code in the second spot we call weakening and really what it does is it just gets people to be thoughtful around what what is fresh pet food and why it might be better for their pet. So it's a slightly different message. It seems to be very well received 'em, we track or advertising incredibly closely and we're seeing really good results on it.
Our payback is now less than a year in our advertising investment. So we're we're really proud of that we think it provides continues to provide an incredible opportunities for the business to grow overtime and take advantage of the or optimize I think the the level of interest out there in fresh pet food.
That's really helpful. I appreciate it last one for me International can you talk about I mean, how important is international.
She you in in achieving your longer term goals for the business and you know is it principally is it is predicated on you growing in Canada in the UK are there other large markets that you may be considering such as continental Europe .
And should we be aware of any kind of investments that you may make in maybe local capacity over time just serve those markets. Thanks.
Yeah first of all all the guidance that we provided when we gave our original 2020 guidance and as we think about our prospects beyond 2020 are fundamentally going to be built off of the U.S. based dog food business as our core where we have the greatest strength in the best metrics and so that's where we lead.
Thats the bulk of our guidance, but I'd also say that we believed that we have a once in a lifetime opportunity to take advantage of our first mover position and do in essence, a land grab but we want to do it in a very responsible way. We think we have done that in Canada in the UK, we have been and we've said this in previous quarters been prospect.
On the continent to figure out what market would come next.
But we're going to be very disciplined about it we're going to build the model, where we validate that each component in the model works then put it all together and validate that it all works together and then begin the investment cycle as we have done in Canada in the UK and we will continually ramp that up we as we told folks. This year, we did make an investment this year in those markets.
We're very pleased with the results we've got a we now have to contemplate how we will expand upon those results next year in the years beyond.
But at this point, we feel very fortunate to have a situation where them. The model is working it's working is intended and we have every intention of taking advantage of the first mover that we've got a in terms of local capacity. Our focus right now is get kitchens 2.0 up and running and then the next incremental capacity that I mentioned in the prepared remarks today is squarely on already.
Our screen and the expectation as we said before is that next that somebody would be a fairly sizable facility, which will be able to support our growth.
Out through a fairly significant number of years beyond where we are so the need for capacity in Europe isn't anything on or near term horizon. Eventually long term if you build big enough business, there you'd like to source in local currency and a in the local ingredients, but that's not our focus our focus is to source that those markets out of the U.S.
For the foreseeable future.
Great. Thanks, so much good luck.
Thanks. My next question comes on line of Ryan Bell with consumer Edge Research. Please proceed with your question.
Hi, I'm. So I was wondering capacity aside is there not you did hear a stick to think about the ability to grow second fridges within the U.S.. We continue to see strong growth in the first fridge number how do we think about the opportunity to expand the presence of second phrases.
You know it seems like there's a good deal of from for growth, but is there a point where states velocities are that turns of a second fridge just don't support that decision.
So I I am I'm going to take a tiny trip down a memory land here for a second.
If or when we first started many years ago people would say there wasn't room for a small first fridge.
I think we're really over that hurdle and really the thing that's that's gotten us over that hurdle over time, where people were now I think 90 something percent of the for just going out the door now well over 100, the high Ninetys, our large like full size bridges, there's very very few small for just going out. So I think if we're able to continue to increase our velocity.
And this is in same store sales our velocity year after year as we have where we're seeing double digit velocity growth.
The year overtime, knowing what everyone have one large fridge, but they'll have a second fridge and then we're actually seeing kind of leaders, but leaders I put in even third bridges in and some location. So we really feel more and more confident I think everyday that the potential of this bid.
This is enormous and that will see we need to build that second fridge number and even in the right situations a third fridge number and I'd say when we come to us when we do our Investor day, and we update folks on the total addressable market and remind folks. The last time, we updated that was in 2016 in a lot has happened. Since then we provide a new view of what the addressable market is.
As Oh, we feel confident that you'll you'll feel like not just having won a large bridges are appropriate thing, but over the over a reasonable period of time, having multiple fridges in a store is a very good investment for both us and the retailer.
Sure that that make sense and if I guess, one more with the competition heating up and the premium side of the pet food category.
You know what are your thoughts about the ability to maintain your competitive mode and have you noticed really any difference in the overall category dynamics that might impact you.
So we're incredibly proud of our progress we're proud of our growth rate, but the reality is were.
Called a $250 million run rate in a $30 billion category so were.
And we have we we recognize more more today that we have so much potential to go forward. This is a been a very very kind of you know long term business developed its very challenging to get into I think that there's.
Opportunity for someone to potentially you know enter at some point, but I think it's I'm a fairly heroic and.
Enormous effort, whether its capital expenditure development and manufacturing supply chain fridges.
But we we talked about them in some of our presentations overtime, we think it's challenging and it's I think it's hard for many people investment they make and the near term returns that they would they would see so at some point I. You know we think someone else may show up we don't know what it will look like and we challenge ourselves.
Everyday to make sure that we are thinking about the business that we're developing as a business where are we may be competing at someone thats very similar.
Today, the nice thing is that as the there has been more premiumization and on many products have become more and more mainstream we were really an and purchase and not an or purchase. So that's actually been to help to us overtime and I think retailers are getting more comfortable with the role that we play in the category. So.
We think theres tremendous long term potential in front of us and hopefully, it's a land where there's a lot more freshpet fridges out there.
But we obviously worked very hard to make sure that what we're developing is good for the retailers and in addition to us and it's a great partnership.
Great. Thank you.
There are no further questions in the queue I'd like to end the call back to management for closing remarks.
Thank you very much for your interest and attention I will leave you with one thought well Rogers. One said, if you think dogs can't count fried putting three dog biscuits in your pocket and then give him only two of them to wish I'd add and if you think they can't tell time try skipping a fresh pet meal time.
Thank you very much.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.