Q2 2020 Freshpet Inc Earnings Call
Greetings and welcome to Freshpet Inc. second quarter Twentytwenty earnings Conference call.
At this time, all participants are in listen only mode.
A question and 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.
I would now like to turn the conference over to your host Katie Turner.
Thank you good afternoon, and welcome to fresh <unk> second quarter 2020, <unk> earnings conference call and webcast on today's call or Billy Cyr, Chief Executive Officer indicates our Chief Financial Officer, Scott Morris, Chief Operating Officer and had her Cameron Executive Vice President Finance, well also be available for Q.
Where are they getting please remember that during the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These statements are based on management's current expectations and beliefs and involve risks uncertainties that could cause actual results to differ materially no. As described in each forward looking statements. Please refer to the Companys <unk> part on form 10.
Files with the Securities Exchange Commission and the company's press release issued today for a detailed discussion of the rest that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today. Please note today's call management offerings, certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA among others.
In many ways. These non-GAAP financial measures provide useful information for investors. The presentation of this information is not intended to be considered an isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with gap.
Finally, the company's produced a presentation that contains many of the key metrics that will be discussed on this call that presentation can be found in the company's investor website management's commentary will not specifically walk through the presentation on the call brought her at the summary of the results. They will discuss today now I'd like to turn the call over to Billy Cyr Chief Executive Officer.
Thank you Katy and good afternoon, everyone I'm speaking with you from Bethlehem PA because in his home in Manhattan, and Scotton, Heather or in offices in Secaucus, they'll do our best to not trip over each other on the call and it's always please excuse any blocking in the background in any other technical issues, we might encounter.
Let me start by saying that won't seems at the world is still quite unsettled Freshpet has returned to the predictable growth has been the hallmark of our business for the last several years, we're largely caught up on supply the stores are back in stock on the vast majority of our SK use or advertising is on air and driving strong increases in household penetration and.
Assumption, our retail partners have returned to installing new and upgraded fridges and our Nielsen measured results show the impact of this we continually accelerating growth now running well in excess of where we were in a pre cobot period and ahead of where we would've been if there had not been a cobot crisis.
That is not to say that we are immune to any future changes in the external environment, because we aren't we still face the same uncertainty related to the public health crisis, and changing consumer and retail conditions that everyone else faces, but we do believe that our recent results demonstrate our ability to adapt quickly to changing market conditions.
And continue to deliver strong results as a result, we're quite optimistic about the balance of the year and our progress towards our long term goals.
The cobot crisis presented some unique challenges, including new safety risks for employees.
I'll be disrupted retail environment, a surgeon E commerce and drastic reductions in consumer mobility.
It also presented some new opportunities, including lower media rates higher media viewership and engagement increased awareness of the role pets play in our lives and their willingness to try new E commerce options.
We believe the Freshpet is ideally positioned to take advantage of those opportunities and break out of the post cobot surge and trough stronger than we went in.
We have a business model where growth is largely driven by advertising, we don't rely on retail promotions the price discounting <unk> to drive penetration games, and we are incredibly nimble company capable of creating and implementing new ideas very quickly.
So at the end of Q1, we announced our post surge habit building on our foundation of keeping our employees safe to rebuild our supply and that would enable us to improve retail availability and offer new ecommerce options with all those key elements in place, we were able to turn on or advertising to drive consumption.
Penetration gains.
During the quarter, we strategically invested in each of these areas, including safety enhancements to protect our team incremental capacity, a kitchen, south incremental retail coverage, new E commerce options and strong media support.
There was also these efforts speak for themselves Freshpet is now growing faster than it was before the call the crisis, but the most recent Nielsen make him make a channel data up in the high Thirtys ahead of the 28.8% growth we averaged in January and February.
Consumption is growing consistently virtually every week since April 18, and shows no signs of slowing.
Household penetration gains are strong the buying rate is also growing.
All this progress would not have been possible without the dedicated efforts of so many of our team members from the folks who have kept our production lines running virtually nonstop since the cobot crisis began to are incredibly nimble marketing and sales teams who use their creativity for these new growth opportunities in a rapidly changing environment.
Position pressure that for accelerated growth.
Who are dedicated customer in consumer service teams worked diligently to help consumers find our products and enabled customers to rebuild their inventories and restore their stores in the face a challenging conditions.
Well most of all I went to acknowledge the Freshpet team members, who have taken on the responsibility for keeping our team safe.
Very foundation of our post surge pivot is built on the idea that we could keep our teams safe and they would then be able to catch up to and meet the rising demand.
Thanks to the efforts to those teammates our team members come to work each day confident that the Freshpet kitchens are very safe place to work. Despite the numerous challenges that the Corona virus presents.
Our safety program has three layers of protection designed to stop the virus from entering our facilities.
Prevented from harboring out facilities, if it does get in and preventing it from being spread from one team member to another.
This program has resulted in us having no record of the virus being transmitted from one team member to another in our facilities. Despite the virus being present in our communities.
That is not to say that none of our team members had been afflicted with the virus because they have and it is an awful virus and is impacted our team members and their families. But it says that none of our teammates got the virus in or facilities. We gave it to another person in our facilities. It's the best of our knowledge and after significant contact racing.
We consider or sold fortunate I have had such good results, but are also incredibly grateful to the team has worked tirelessly tirelessly to keep our team member safe without them none of the outstanding results I'm about to share would have been possible.
I would also add that we're very grateful to the teams at St. Luke's Hospital, and we have Alley Hospital network, who have provided us with nurses testing advice and help for our teammates in need all the care for so many other members of our community during very challenging times, we could not have achieved the results we did without their support.
But we're not out of the woods, yet until there's a vaccine or effective treatment with the virus is no longer present in our communities must continue to be vigilant.
Yes, we will continue to incur some of the $4 million in fiscal year 20, cobot banking cost that we outlined last quarter, although the cost will likely be lower in Q3, then in Q2.
Part of that reduction is because our absenteeism has dropped significantly since we reinstituted absenteeism policy on July 1st with exceptions for employees with underlying health conditions or who have someone at home at significant risk.
Absenteeism is now running in the mid single dish and digits versus the mid teens, we experienced in May and June.
Now onto the results.
We feel very good about what we accomplished in the quarter.
We posted our strongest quarter net sales growth since 2015 and were able to drive a significant portion of that stronger top line into our best bottom line performance ever.
Net sales were up 33% versus year ago, and adjusted EBITDA was 10 million higher end result, we posted one year ago.
As a result of this strong performance and the continued strong trends, we're seeing we're raising our net sales guidance for the year from greater than 310 million to greater than 320 million, representing greater than 30% growth any your filled with coated in capacity challenges.
We're also raising our adjusted EBITDA guidance I 2 million.
Nick will provide more details on our guidance later.
The strong topline results are the product of 21% Nielsen measured channel consumption growth for the quarter, despite starting with less than 10% growth in April post surge trough.
And the volume benefit from refilling the trade inventory hole, we got earlier in the year.
The consumption growth accelerated throughout the quarter, ending with 30 plus percent growth in June and still accelerating into July where growth is now in the high Thirtys. This is due in part to some outstanding work by our marketing team to make it very timely pivot replanning and rescheduling or media investment taking the spending.
Out of the shelter in place trough in April investing more heavily in May two October taking advantage of the higher viewership and lower media rates, we're now seeing.
Result was that we saw returns on our media investments well in excess of what we have seen historically and that is driving the accelerated consumption growth we're seeing today.
It is also driving very strong velocity growth measured as dollars per million ACB, hitting 19% growth versus year ago in the most recent four weeks.
The Q2 growth is also the result of the efforts of our manufacturing team to produce enough product to catch up to the demand.
Freshpet kitchens never stopped operating in the quarter producing record quantities and in conjunction with the additional capacity we put in place a kitchen Sal we were able to increase or fill rates from the mid seventys in early April to the ninetys by the end of the quarter, you're still not at the 95 plus percent rate we expect.
Due to tighter capacity on a few items and surging demand. We're getting close we will however have very tight capacity on our fresh in the kitchen items until kitchens 2.0 begins producing salable product in Q4.
As a result of these efforts, we're able to largely refill the trade inventory hole, we had at the beginning of the year and which we dug deeper in Q1 behind the cobot surge, we filling those two holes combined to add eight points to our growth rate in the quarter versus the consumption growth rate, we experienced I want to be clear that we ended the.
Quarter, we treat inventories still slightly below what we would consider normal largely focused on a few skews that we're still catching up on.
We also got the benefit of a slightly depressed quarter in Q2 last year due to short shipments in that quarter, providing an additional three points of growth versus year ago and improved performance on spoils this year, adding another point.
Recall in the second quarter of last year, we had some manufacturing issues have resulted in short shipments and an impact on our gross margin in that quarter.
The favorable comparison that created versus year ago will reverse itself in Q3, as we caught up on shipments in Q3 last year.
A full reconciliation the gap between consumption growth and net sales growth in the quarter. It's in the accompanying investor presentation.
If you look at the year to date results you can get a clearer view of how we're performing.
Year to date Nielsen measured channel consumption growth is up 27% versus year ago through the end of June and accelerating.
Year to date shipments are slightly ahead of that a 31% due to the trade inventory hole, we had at the beginning of the year. It's short shipments in Q2 of last year and improvement in spoils this year.
That reconciliation is also in company investor presentation.
Another driver of our improvement in Q2 was a significant improvement in retail conditions.
Our sales teams in partnership with our customers and our broker partner, we're able to restore the retail conditions and we now have greater than 90% in stocks, most skews and most customers.
Additionally, you're now benefiting from a significant number of Encap fridges, and double fridges and high profile retail outlets.
The consumption growth was broad based with each class of trade show in growth by the end of the quarter and only pet specialty not showing growth for the whole quarter.
But even the big back box pet specialty business showed strong growth by the end of the quarter posting double digit sales growth every week in June impart due to the placement a second bridges in more than 744 stores and the foot traffic generated by the resumption of their services business that growth has accelerated further in July.
Our E Commerce business grew rapidly as you would expect.
201% versus year ago.
Curbside pickup and last mile delivery services like Instacart grew the fastest resulting in more than 90% of our ecommerce business going through our in store Fridge network.
We are most encouraged by the strong engagement, we got from the new advertising you ran that featured our E commerce options, increasing click throughs on our website, where we now prominently feature our various E commerce options and make it very easy for the consumer to get fresh Pat anyway, they want it.
Our small scale DTC business is serving its purpose of providing a customer service to those afraid to go into stores and not comfortable with other E commerce options as well as teaching us a bit more about DTC.
But it is a very small and not material to our results.
Household penetration growth was strong at 19% despite canceling the able media due to the conditions of the stores and the shelter in place orders.
Penetration of our core dog business I eat the main meal items, which accounted for 92% of our sales in the quarter grew 21%.
Since the beginning of the year, we've added 350000 households towards our goal of 5 million new households by 2025 that is on pace with our expectations.
Hi, great resumed its growth growing 6% on a total business and 5% on the core dog business.
This is what you would expect when the number of new users added in the quarter was not so big that it would overwhelm the gains made in the existing user base as it did earlier this year.
Purged placements slowed in the quarter as we hit if indeed indicated they would the incremental placements were not inconsequential.
We added 253 net new stores in the quarter, bringing our total for the year to 550 and putting us on track for our 1000 net new stores target.
As a result, ACB was up 12% versus a year ago, but only <unk> 0.5 points ahead of where we ended Q1.
More importantly, we added 764 second fridges in the quarter now have added 779 for the year.
We upgraded another 186 bridges in the quarter, taking our total upgrades year to date to 280.
Remain confident that we'll be able to deliver our revised targets 500 upgrades and 1002nd Fridges This year.
Total distribution points, Pdps rub, 20% versus year ago as a result of the large number of upgrades and second fridges, we placed and against the out of stocks, we incurred in the year ago period.
All this combined to drive the strong topline what's on the quarter and give us confidence that we will see continued strong performance in the back half of the year, we're particularly bullish on the back half of the year as we had advertising on the air for most of the summer for the first time ever hi, viewership and though media rates and that is continuing to drive.
Strong consumption gains.
Wilson make a channel consumption has been up 37% versus year ago. During the first three weeks of July.
We entered the third quarter was strong and accelerating consumption growth trends strong household penetration and real momentum on fridge placements all that should should switch support strong growth and make 2020, our strongest growth here since 2015 in Freshpet grew 34%.
To support that growth, we're making very good progress on our capacity expansion initiatives. So far this year, we've taken our second roll line to a 24 seven operation in January started up kitchen, South in mid February and added a second shifts there by the beginning of June.
At this point, we've run rate capacity of $350 million or about 87, and a half million per quarter, assuming average absenteeism and holidays and full utilization of the product mix our lines produce.
Kitchens 2.0 is on track to start up within the next eight weeks shipping saleable product in October and meaningful quantities in November.
Once the facility is fully operational by Q1 of 2021, we will have almost 600 million in total capacity, making 2021. The first year in quite some time, we have the ability to grow without worrying about capacity.
We intend to take advantage that capacity.
Also we are breaking ground next week, a kitchen 3.0 in Ns, Texas. This facility will be built in two phases and is targeted to be operational by the third quarter of 2022 once fully operational we'll take our total capacity to about $1.3 billion.
Adjusted EBITDA in the quarter was $11.2 million 10 million or more than nine times a year ago as we demonstrated the significant leverage we get from scale, particularly in adjusted EPS gene a excluding media and the contribution from incremental volume.
Before I turn it over to deck I want to inform you that next week, we'll be releasing the proxy for annual shareholder meeting in September.
And that proxy, we will outline a significant series of steps that we were planning to take the transition from the governance practices. We've had since Freshpet went public in 2014 as a fast growing small cap private equity backed company into the governance practices of a fully mature 1 billion dollar company with a broad sophisticated.
Shareholder base by 2025.
We will match, the increasing scale and complexity of our business over the next five years. They step by step process that removes many of the governance practices associated with early stage companies.
We will begin by recommending the elimination of Super majority voting requirements. This year and follow that with a series of actions each year through 2023 that we're committing to in our proxy. This plan was developed by our board after consultation with some of our most significant long term shareholders with advice from governance experts and.
By studying the academic literature on the best ways to optimize success for high growth companies like ours.
We believe this plan delivers the right balance between the guidance needed by early stage companies and the governance required for larger more complex companies from our board over the next phase of our growth.
We also believe that laying out in committing to a long term plan of governance enhancements now provides the greatest clarity for our investors about how we will continue to grow and develop freshpet and is in keeping with what they have come to expect from us I eat a highly disciplined transparent and proactive approach to long term development of the company.
They have invested in <unk>.
We will be speaking with members of our shareholder base about this once the proxy is issued later this month.
I'll now turn it over to addicted to discuss our Q2 financials in more detail and our outlook for 2020.
As a reminder, this will be the final quarter that Dick will be we'll be presenting our financials as the CFO.
On October Onest 2020, Dick will become vice Chairman and Heather Pomerantz, who joined US in January will become the CFO.
Dick is taking this business from a start up through the Angel investor and private equity phases through a public offering and two subsequent equity offerings to accompany that now has a market cap in excess of 3 billion and is showing no signs of slowing down.
And that is just the last 14 years of its almost 50 years as a financial professionals.
He had enough achievements before freshpet to satisfy and impressed almost anyone including a very successful Ron <unk> private equity backed companies.
But in an age when most people think about retiring Dick started on the fresh pet journey, we're awfully glad that he did we would not be where we are today. If it had not been predicts intelligence tenacity creativity and good humor. It has been a privilege for all of us to have him as our CFO.
The last seven months have provided Heather a tremendous opportunity to learn every aspect of our business haptics vast knowledge and begin to forge relationships with our team in board the analysts who cover us and our shareholders. She has been part of the launch of our new five your strategic plan.
Successful equity offering the renegotiation of our credit facility and all the challenges presented by the Koby 19 crisis. Her presence gave us added horsepower to manage all that work assignment simultaneously, bringing her up to speed on our business.
Through it all Dick has been a tremendous mentor to Heather and he will continue to be available to all of us in his new role that has made this one of the most successful transitions, we could have hoped for and I hope it as an indicator to all the view that we continue to put in place well thought out plans to manage the many challenges of a rapidly growing business and now let me.
Turn it over to deck.
Thank you Billy and good afternoon, everyone.
When Freshpet got started in 2006, I never dreamed that I would have the opportunity to present coated results like the ones I've shared with you today.
Despite the incredible chaos in the World Freshpet is hitting on all cylinders.
Delivering very strong and accelerating growth and successfully taken the benefits that growth to the bottom line.
Back to deliver it exceed the 300 million net sales goals, we laid out three years ago, when we launched our feed the growth plan.
And we off too and we're off to a very good start towards our 1 billion goal in 2025.
We are adding bench strength and manufacturing capacity of that at a rapid rates what that go.
As Bill indicated quota to net sales were $80 million up 33% versus year ago period.
The first six months of 2020 net sales are up 31 cents versus year ago.
The six month view allows us to normalize impact with the surge that occurred in March the trough that occurred in April.
As we said we ended the first quarter I capacity limits in quarter, one prevented us from having shipments mass retail scanner sales, but would allow our shipments to better match actual consumption.
We had to refill the depleted trade inventory pipeline in quarter. Two so our first two quarters look more consist with each other and more normal.
Then most CPG companies will.
More importantly, though we have emerged from the chaos and last five months and very good shape with a strong growth rates.
Outposts search pivot as work as a result, we're raising our net sales guidance for the year to grade $320 million that would take our growth rate for the.
Year to at least 30% this growth rate is stronger than the first half growth rate when you adjust out the rebuilding inventory that we did in the first step the so softer comparison in quarter two.
Additionally, this years third quarter tougher comparisons in quarter, two because that is when we rebuilt trade inventory in the year ago period.
But with our current 30 plus percent growth rate, we're seeing in our Nielsen measured channel data, we believe the new guidance is appropriate.
Adjusted gross margin for the quarter was 49, we want to set up 60, bips from the year ago period versus what we get in quarter, one out mix shift back towards bags for roles as we had indicated.
And that negatively impacted our March.
We also had a full quarter production catches south which provides a slightly lower much.
But overall, we had strong performance in the quarter.
However, we're now expecting higher beef prices for the second half a year that will impact the gross margins a bit.
Come in slightly below our target of 49, 50% gross margin for the or as a result of that costs increase.
Without it we believe we would achieve to go.
Yes.
It will also you eat into the contribution from the incremental sales reflected in our revised guidance without that increase would be contribution from the 10 billion in higher net sales will be about $4 million or we think we could absorb about 2 million higher beef cost starting the second half the year. So we are only raising our adjusted EBITDA guidance to 46.
44 million.
It's always hard because persist into 2021, it will look for opportunities to offset those increases via pricing and other efficiency improvements.
Our media spending this year will really be a bit more evenly balanced between the first half of the second half than in prior years due to cope with crisis, we told advertising out of date spread throughout the summer as a result, our advertising will be split 65 35 between the first half of the second.
That turns out to be quite for two this is media rates are lower now there's higher viewership.
Yes that is creating significant media indices that we want to capitalize.
Adjusted after the quarter was 28.1 million or 35.1 set of net sales an improvement of 1100 30 basis points versus a year ago period.
Moving the media out at April shelter in place times here to make through August stroke, 350, 340, Bips that improvement.
When you exclude media spending adjusted EBITDA improved by 260 basis points versus year ago, and keeps us on track for our 2020 golf.
Adjusted EBITDA in the quarter was 11.2 million up 10 million versus a year ago period.
Its financial men metrics demonstrate the meaningful data from scale, we get across our P., though an essential part of the virtuous cycle embedded in our feet the growth plan.
Also good indicator of our ability to grow adjusted EBITDA in excess of net sales as we achieve meaningful scale.
From time to times, which used to increase investors to capture incremental growth opportunities.
Excluding those opportunities we expect to continue to generate scale benefits in the p. It now and expand adjusted EBITDA margins for the Siebel future.
We're continuing to reject that we will incur 4 million extra costs related to covert Nike crisis, this year, including enhanced compensation for employees increased efforts to protect the higher cost to protect our supply chain and other related costs.
The results indicate it's been a very good investment has allowed us to run outlines continuously and catch up to the demand.
But more importantly, he was the right thing to do.
And that was why we did.
And the second quarter, we incurred 1.6 million that 4 million year to date, we've incurred 1.9.
We believe that we will continue to incur costs, but a lower level in quarter three they will taper off in quarter four.
About three quarters of those costs are about $3 billion waging absenteeism related costs and the remaining 1 million Kozikowski people states such as nurses in our operations.
As we communicated previously you're heading back east coast to our adjusted EBITDA.
Sure you reiterate our guidance is now for net sales greater than 320 million and adjusted EBITDA grades at 46 million. Our guidance continues to assume that the external environment progressive as it has to the last month or two that there are no additional significant disruption to the supply chain our customers for our consumers.
Excluding any issues from an adverse macroeconomic environment, an increase social unrest.
I will liquidity remains very strong at quarter end, we had 128 cash cash equivalents, a short term debt certificates of deposit.
Early April we amended and expanded our credit agreement now have a 165 million senior secured credit facility that we have not yet trying to.
We believe those resources the cash we expect to generate from operation is sufficient to meet our long term capital leagues.
We have invested 71 million of capital against kitchens, 2.0 projects, so far and other projects is designed to increase our capacity I would tell us spending on the east project to date is $91 million.
Working capital increases offset.
Seasonal phenomenal for our business so cash used in operations was 5.1.
We continue to expect caught positive cash from operations for the year.
In closing we are incredibly well positioned to succeed we have a winning brand with a strong product an exceptional idea.
Growing consumer interest and less process more natural who is going and trending up and treating our pets well a highly capable organization has proven to be after the challenge in front of us strong balance sheet.
We are extremely grateful to our teammates who have worked so diligently on the very challenging circumstances.
We are also very accretion of the work done by our customers suppliers and their employees.
We are all this together I'm proud of how our industry has pulled together this is quite each other and we remain committed to working collaboratively with them and all the federal state and local officials who are fighting this public health crisis.
The personally just it's been an incredible fund right.
We started from zero would have created 500 jobs nationally recognized brands and a product that is good crop pets pets love.
I can't tell you how proud I am.
Together with the people I work with every day, so dedicated to what they do it so incredibly professional.
And as real join to see how we're changing the way people see their pets for the better.
Finally, I can't say, how much I appreciate the investors will lead to notice any analysts who have spent so much time with us trying to get to know the storage tells us they caught her about what we're doing.
We have better floor, but I'm glad that we've been able to be what those investors is stuck with us significant value that has been created.
That concludes Alcobra will now be glad to take your questions operator.
Thank you Sir.
This time will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we pull for questions.
The first question today comes from Peter Benedict of Baird. Please proceed with your question.
Hi, guys. Good afternoon, and I'll start off congrats to deck, obviously, a you know quite a journey with this one so well done congratulations it's been it's been great working with you.
I guess it the first I've two questions. The first question is just maybe Billy how you're thinking about the sustainability of this new consumption growth trend that you're seeing.
Tom you talked about your ability to fill it in the capacity, but just thinking about more on the demand side is there a other indications that new pet adoptions are helping drive this sir.
How are you thinking about bad and as you think about the second half of this year or 30% growth.
Any any differences between third quarter fourth quarter that you see today that we should be we should think about that's my first question.
Yeah. Thanks, Peter Yeah, obviously, we're very pleased with the growth. We had in you know we gave you a lot of a ways to think about the trend that we have so far in what you should expect for the balance of the air I think simply put the way to look at the first half year was we ran at 27% consumption growth.
Versus the year ago, yet we've seen it accelerate and in a as I said in the a in the prepared remarks that growth in the last three weeks of a of July were 37% growth.
And then they will make a channel data. So you can see there's quite a bit of acceleration.
As we think about the compare the comparison, there's a tough comparison in Q3 versus the year ago, because we we filled the pipeline in July of last year versus the flip side was what happened in Q2.
And we also have a capacity limit in Q3, and they said in his prepared remarks about 87, and a half million dollars a if we shipped everything perfectly according to to our capacity, meaning the next exactly master capacity. So it's a it's a fairly tight third quarter the fourth quarter when kitchens 2.0 comes online.
Is when things really loosened up for us and we'll have particularly our fresh in the kitchen particle awful lot of capacity and if you think about where does that leave us in had a habit heading for next year I'm. We believe we will end this year with significant momentum and expanded household penetration base because the media investment that we're making wish it skewed more.
Towards the back half this year than prior years and at the sizable investment will leave us with a much deeper household penetration gains that will carry into next year next year will be year. The first time in several years, where we really won't be tapped by capacity limits I will be able to run a fairly pray and so you think about the tailwinds.
Well have the benefits of the added household penetration will have the adding capacity. We've gotten retailers are now very energized and oh by the what they've seen from the growth rate on Freshpet. How quickly we came out of the trough how strong our overall growth rate. It and also the business that left them on other dog food brands that when indeed.
Yes, and probably isn't coming back as quickly as they might have hoped at what.
Makes us look even more strategically important so we're starting to see a retailer poll for a more break is bigger FICC isn't second searches. So I think it when you add how long as they try and get a last I you know I say the condition, but very favorable we're looking forward to next year being a very very robust your growth for us.
No okay that makes sense and I get my second question is just maybe an update on the on the direct to consumer efforts I mean, I know, 90% or more of your ecommerce is going through the existing fridges, but just trying to understand maybe the efforts that you started this year around the DTC.
And then your plans to kind of expand maybe your consumer access to freshpet through through direct channels is that's my second question. Thanks.
Yeah, Scott will take Uh huh.
Hey, Peter it's Scott.
So we you know as we've talked in past couple of years, and we we want to be as omni channel as possible and making sure were a have a products in our portfolio with available because many people as we can in many different ways [noise].
Commerce has been something at the expanded a lot lot couple of years in the way, we do like to think about what's happening Cove. It is it's something that was probably going to develop over three years, probably developed in three months word horse a lot of people and including my kind of 72 year old mom to starting to get shipments from a instacart.
And a you know more more people using click and collect and many different vehicles out there now.
Probably remember that the vast majority of what we look at E. Commerce, I mean does support our fridge network. So that's everything from the department shale well everything around while they quickly from Kroger and all the click and collect model.
The boom those grew quite fast because they had capacity to really kind of expand and absorb the influx of consumers coming and we also saw a really great growth or around everything that was like amazonfresh or freshdirect. All those models to we did go ahead and during our response one of our risk.
Most of the coated was we did kick off a very small test around direct to consumer we were finding there were a handful of consumers are very concerned about going through a store and feel like there was good access. So we didn't kick something all along we tested it for a while it's still up and running and we're getting some orders. It's a it's incredibly minimal at this point, but it's been a really really good expense.
Trends and educated us as an organization.
For the for the time being I think what we'll do as we can you evaluate that and decide how we addressed this into the future right now many of our retailers are really excited about the opportunities to continue to build out the portfolio retail and that's obviously going to be the majority of our focus [noise].
Okay makes sense. Thanks, so much guys good luck enough.
Great. Thanks, Peter.
The next question is from Ken Goldman of JP Morgan. Please proceed with your question.
Thank you and Dick.
Heartfelt. Thanks for me to for all your help much appreciate it good best of luck.
Oh.
[laughter] I wanted to ask if you could be a little bit more specific on where the the meat inflation is coming from that you talked about.
I think you do lock in your chicken earlier in the year and we saw beef higher for about a month to then it really collapse. So I'm just curious if you could add a little bit more color into that comment that you made thank you.
The candidates as Billy D. C inflation that we're seeing is on beat 'em. We got we by different cuts of beef and you might see and typical grocery stores, but chicken fine as you're right. We've locked in chicken for the year. So it it's exclusively a.
Beef issue.
Okay. Thank you for that and then follow up if you mentioned this I didnt hear it I apologize, but I know you talked about media rates being lower did you lock in those rates through October or is some there but is there potential volatility into what you're paying if demand for advertising goes up.
Got you went to the that yeah. The vast majority that is locked in and MLP. The rates I mean really touched on that the rates have come down five seven up to 10% depending on what you're buying but I think it's the productivity or the effectiveness, that's gone off and that that doesn't impact that people being a little more focused.
On TV, but we've also had really extraordinary creative that we've been able to put on during the period. So I think we really kind of played out incredibly well, where we we and I know on expanding answer a little bit here, but what we did it we literally kept an eye on when we were gonna do you have a little bit more capacity and then we went ahead and it did we thought we were going to have.
We committed to additional media because we knew the cost was better and it was also being more effective. So I think we kinda please coming out of coven honestly, a a pretty well [noise].
Great. Thank you.
Thanks, Ken.
The next question is front Bill Chappell of Truest Securities. Please proceed with your question.
Thanks, Good afternoon.
Hey, there.
Just trying to understand the kind of capacity the remainder of the year [laughter] I mean, we and I'm sure you.
There's been certainly a spike in kind of pet ownership across the U.S. and clearly it seems like you're seeing some of that show up in July.
Is there a ceiling you know these next three four months until two old comes out in terms of growth would you look to source some of that out and does that have some impact on margins just trying to understand you know the path between here in two data opening up.
Yeah, that's a really good question.
So right now we as you said in a script, we got that the rolled capacity we were fine on we started on afford a our fourth.
Our roles line second Falls line went to 24 seven back in January and we're going to be fine in that until the end of the year. So bags is the only place we've had issues recall, we started up kitchen south in February and we put a second shift in there in June and that has helped us catch up so it means the place that we're gonna be tightest is our fresh and the kitchen products because that's only meeting.
Our facility and only on one of our two lines. When we start up kitchen is 2.0 in the fall starting at up that will bring on a basically will triple our fresh from the kitchen capacity once it's up in fully operational and so that's sort of the next lever there is a little bit of potential for tightness on some of the bag.
Products between between now and then but if you think about it right now we have $350 million to capacity. If everything was used uniformly which means it's basically a ceiling of $87.5 million a quarter, assuming normal absenteeism and normal and normal holidays scheduling.
So as you think about heading through the third quarter, it will be kind of a tight quarter as we head into the fourth quarter kitchens 2.0, we're very comfortable will start up in September salable product sometime in October and then meaningful quantities in November and December so by the time, we get to the ended the year, even if weve drawn down some trade inventory.
In a third quarter in the first parts of the fourth quarter, we should be able to refill any trade inventory holes that we have created there might be a little bit of out of stocks not a lot on a freshman kitchen, but for the most part I think we'll be able to get all fully caught up by the end of the year. So just a little tight mostly on fresh from the kitchen did that that clear enough or do I didn't give you little bit.
No. That's great. Thank you and then just a follow up you know I think you've had storebrand from a one retailer in years or in your kittens or I mean in your fridges now for about a year, so kind of any update.
How that's going are you expanding it to bags and then no do you expect any kind of trade down if we have an extended recession.
Hill, Yes, so I think that's it it's a really good question something where we.
We are really we played this out really I think well we've been very thoughtful about the items that we've chosen we don't anticipate a anymore expansion of those items in the near term Oh, well over the very long term, we do anticipate that we will do some additional partnerships with the retailers if we can play.
In the right proposition that fits in that incremental to our portfolio and that's really what we did with that that first test that we did and we've been able to prove out that it did it works, but in the near term, we don't see anything and the next kind of six to 12 month, we don't anticipate anything significant changing from where it today.
[noise] okay. Thanks, so much.
I still think level.
The next question comes from Mark Astrachan Stifel. Please proceed with your question.
Yeah, I think and afternoon everyone.
I wanted to go back to one of the earlier questions and then kind of build on that so you alluded to.
Leverage in driving customer acquisition costs me that they were becoming more favorable.
What did what or who are the new consumers that are coming in it you see it the break out the did you all like to give between visitors mixers and loyal users and partly I ask because I want to ask more of a main question around the buying right. So that was up decently for core dog after the.
Flattish last year. So yes are we talking about more productive consumers that you're bringing in use a leveraged customer acquisition cost Vicki maybe give us a bit more detail. There and then how do you think about that on a go forward basis to presumably it's not just a household penetration that is increasing its obviously the other side of it as well that drives the sales growth upside.
Oh, yeah, so that people who are coming in.
First of all I would say that when you know looking at the usage patterns I'm not sure we have enough detailed data yet on this this recent increases I. Yeah. We do know, though that we are seeing the disproportionate amount of our growth is coming from the younger audiences. So the millennials that that gen deed, that's where the.
Market seems to be moving that's where the market is shifting I think it's probably and Scott might have some commentary and its thinking might be a little bit too early in the lifecycle to say well, where what their usage habits or other than the most recent data. We have now this is pre cobot at least the data that I've seen suggests that the people who are coming in are looking extremely similar and.
Terms, the buying habits and practices as the people we've been acquiring over the last several years and they're going through a very similar curve in terms of the practice is up by try it makes it top and ultimately get to some ultimate pattern, which we'd hope would be using the product on a on a full time basis.
That's what we're seeing in terms of the that the comment about the binary we're glad to see that but we actually decompose that quite a bit over the last couple of quarters and when we looked at it. If you took out the incredibly significant number of new people, you're adding like we're adding 30% new buyers. If he took it down to who are the people had been around for more than a year they were actually increasing.
Buying rated about the same rate we've seen all along so we were not at all worried about that buying rate you know looking flat. It was it was purely being diluted by the rapid increase in new users. It's got enough I got that right on the consumers who are adopting are not as you see it any differently.
No no I think it exactly right I mean, the what were we have some me peak here in there from a handful of different retailers shopper data and a it does look like it's a very very kind of similar consumer group, that's coming in and overtime, you don't know upfront, but it appears that very similar in there.
Their adoption curve will be you know trial, and then overtime to to kinda graduate up to a higher levels of usage.
So so very very similar I think the buying rates being driven by existing customers as our take I don't think it's a new consumers that are driving the buying right.
Thanks.
No.
One other point is.
One other thing Thats really productive for us has been the launch of our small dog. It's now been it finished third year, so two and a half years old and that small dog is continuing to grow at a very very rapid rate and those users tend to be people, who adopted and use it as a complete meal replacement and that certainly helping us.
Yes, that's very helpful. There thanks guys.
Well.
Thanks Mark.
The next question comes from Brian Holland of D.A. Davidson. Please proceed with your question.
Thanks, Good afternoon, and a allow me to pass on my congrats to pick as well and best wishes.
You know if we talk about.
Really I think the past couple of years you.
One of the first thing you've talked about you know capacity use your biggest.
Limitation to growth as we start to move into 2021 that eases a little bit.
So I'm curious with 2.0 coming on board.
We pick from.
Capacity being your biggest constraints of growth to really how much you want to smoke on BD and public media standpoint that that seems like it might be driven by how how how much you want to control that growth such that survey reasonably if that makes sense. If you could just help me understand how you're thinking about bad.
Antigen growth going forward, because obviously good run pretty hard on media and wouldn't see a slow down the household penetration, but certainly at some point that becomes a maybe an issue to serve that level growth. If you could help me understand how you sort of walk that tight rope.
Yeah. It that's a that's a very good question, Brian So first of all as we've said all along when we have capacity we want to fill it it's both in our financial best interest. It's also in our strategic interest because we view that that and that's the land grab so as we head into 2021, you know we have every incentive to try to as productive.
As we can making sure we're getting good returns for the investments build that capacity and but do it in a responsible way, where we don't compromise our quality or the our ability to supply the product. However, I'd also encourage you to think about that you know we've already committed we're building our facility in Texas that we'll break ground on it next week and we.
We'll have a that up and running in the third quarter or so roughly you have 2022, and we want to accelerate into that so that when we get there we need it it comes on time and its reliable so probably at the end of this year, we're going to sit down and look at how well do we start up kitchens to point out how far along are we in the planning design and construction up 3.0.
And we'll also take a look at what we've done a kitchen, south and say hey, if we need any buffer capacity to support more rapid growth that's something that we should consider as well because frankly, we get good return for the investment and we can accelerate our growth. It's in everybody's best interest for US to go do that so you know your your comment about media being the driver absolutely.
But you can imagine we tested and are looking at how we can use media to fill capacity and if we need to add more how we would add more.
Great. Thanks, I appreciate the color around it's kind of course it for you.
When I speak about the media spend and I'm kind of the campaign and how you look to reach.
Users.
I'd argue that the messaging might have to look drastically different today than six months ago. I'm. Just curious if you can talk about how you sort of pivoted.
The messaging.
Two new or potential new consumers. Thanks.
You know it's a it's a good question, Brian and I don't I want to bore everybody didn't go through everything that the I mean, the marketing team did a brilliant job in marketing team. They are agency creativity to did a great job our planning is going to degrade job.
But and I don't want a board, but what I would say is the ability to be incredibly quick and nimble in this atmosphere really afforded us some incredible opportunities that and being kind of bullish and entrepreneurial I think really afforded us a lot of different opportunities along the way and that's what gave us the windows.
We were able to put some new creative on air and that was really relevant at the time when people were home and watching tons of TV arm and we that's not the only thing I mean from a digital standpoint, we layered in all types of different things from digital art digital advertising digital communications too. So I you know I I love.
The talk a lot further about it but I really I don't want to kind of get into a kind of a play by play but I do think it goes back to how we think about a running the business in the theme I will constantly pay is think big but they small and you know operate in an environment, where we made a successful all along the way and let's find partners there.
Can operate the same way and I I do think that's the piece of the fine.
[noise] appreciated Scott Thanks best of luck everywhere.
Take care bye.
The next question is from Jon Andersen of William Blair. Please proceed with your question.
Hey, good afternoon, everybody and congratulations it's been fun working with you.
Thank you.
Question Oh My question is around retail execution Bill you mentioned in the prepared comments that are obviously you know retailers have had a lot on your plate.
That's been cause for perhaps a little less.
New new distribution this year, where where do you think retail customer sit today with.
Respect so they're both ability and willingness to you know place new fridges and.
What are your expectations for a net new.
Stores through the balance of a year or by the end of the year [noise].
So on the last part of your question our expectations are consistent with the guidance. We gave you at the last Ah.
At the last quarter, which is 1000 net new stores, obviously, a big part of that is how many stores are going to be around because there are no stores that are going to close but we're still sticking with the guidance. We gave you. The last time I would offer one overall comment.
On the east customers willingness to do that I think most of them are now back to doing their normal.
Merchandising routines and whatever their operations are that you know may not perfect perfect, but pretty close and it could go backwards, there's no doubt that it could go backwards, but what we're seeing is the strategic interest in fresh pet growth through this whole experience and so we saw customers putting in second and third fridge, three fridge islands and some.
Doors in the middle of this chaos, because they've now come to believe that Freshpet is the way that they can win a in a in this kind of environment and it doesn't matter, where we saw what channel. They went in they all seem to be delivering very very strong performance. So I would say this is an overall comment that this cobot crisis in sort of the rush on stores in the drive towards E Commerce.
Had served to accentuate a this strategic advantages we offer to the retailers and that may not nestle turning to stores. This year, but I'll certainly turned the stores in the first half of next year.
Great. That's helpful. When one quick follow up.
I just want to.
Talk about the cadence for a minute in the second half of the year.
There's been a lot of discussion around capacity. It sounds like you have again the capacity that's implied right now is around 87, and a half million per quarter.
With the perfect mix as you pointed out you know of bags enrolled and fresh from a kitchen.
Assuming the mix you know comes in you know somewhat different you know them that should we be thinking about.
Stronger growth in the fourth quarter, perhaps than the third quarter or just in light of the fact that you'll have 2.0, you know kind of coming on and have addressed the fresh from the fresh from the kitchen limitation or do you expect a pretty uniform a growth rate through the second half of your thanks.
Yeah. So two parts that so first of all you know historically, our third and fourth quarter been about the same size a there's a variety of reasons for that not worth going into on but historically they have been I would say this year it might skew more towards the fourth quarter for exactly the reasons that you laid out I'd also say that if you're measuring it not on in Nielsen consumption basis, but on a shipment basis in our.
Reported revenue as I said, we're going to have a tougher comparison in Q3 than we were on Q4. So you should expect to see a little bit more in Q4, just because if we draw down the trade inventory a little bit at the end of Q3, we would refill it back in Q4 and kitchens 2.0 comes on.
Great. Thanks, so much and congrats on a great quarter.
Thanks.
The next question comes from Rupesh Parikh of Oppenheimer. Please proceed with your question.
Good afternoon, and thanks. Thanks for taking my question I was I guess, just going back to some of the new customers that you gained during the quarter any sense, whether those consumers are buying fresh start for the first time directly online or through click and collect versus getting it directly from your fridges.
Got you have any thoughts on that yeah, I I the majority of them our end up being retail customers. There now look there is there's a slightly above average a group of people that are are there are picking it up online or what we consider online through E commerce, but the vast majority are people that are finding a three.
Well and Ah you know buying out the retailing and starting to use freshpet from those sources.
Okay, Great and then I think there.
Yeah, sorry, Patrick I think the thing to keep in mind is the core idea around where people are buying there the rest of their fresh groceries, there they're milk eggs their needs there produce whatever it maybe that's the trip that were typically going to beyond and sometimes you know we saw the trip it.
Band and stretch a little bit, but then the buying rate was up in short period. So net net it it kinda it worked out a pretty pretty evenly fourth but that's I think a good rule of thumb, Quebec.
Okay, Great and then if you look at I guess building, maybe just going back to the strong consumption trends that you're going recently any sense, where whether consumers are stockpiling morrisons sensors into product at the for it is right now.
Oh, Yeah, I'm Lucky that.
Go ahead.
Yeah, I think every once in a while there are people that you know there's been a skew or a certain product that they haven't been able to get and you'll hear someone oh I bought two of them today, but for the most part just buying are being a fresh product, it's not really conducive to stockpiling and the other thing is and I don't want to like Oh.
For overly focused on it.
You know the vast majority you know over 90% of our products were there I mean, there were some periods in some stores, where it wasn't as available but they were there there were products to buy.
It definitely impacted some of the sales in the period. So I think there's a few people that that art did kind of by an extra bagger. So here in there, but that's not what's that that's not really the fundamental that that's driving the business at this point.
And Rupesh if that were true we would've seen at in May and we're shipping and growing at a much more rapid rate in July than we were in may So I didn't get there'd been a well ups I couldn't get at the last time I buy it now they would have done that in May maybe Jim but July worse were much stronger than we were named June.
Okay, Great I'll sneak one quick one and then just on advertising what did you see from your peers during that timeframe like where they were they also was I guess was or intends to be similar to where it has been a did they pull back or just any thoughts on what you're seeing from peers.
Oh, you know, we don't and that it some of this is anecdotal unfortunately, because the some of the data that we get on some of the advertising levels is is a little bit in the readers and we don't have it all quite yet, but we from what we can tell it was similar to slightly down first for men.
We have our pure there were some new entrance I would say newer people into the category that did spike their advertising. So overall share of what we probably see even with the more traditional players I'm. It looks like there was a little bit of an easing during some periods.
Okay, great. Thank you.
[noise] [noise]. The next question comes from Ryan Bell of consumer Edge. Please proceed with your question.
Hi, everyone. When when you think about the short term increase and work from home has there been away that you've been measuring increased pet parent trends.
And then outside of the short term implications as their teams any work to understand what say you know one incremental day at home.
Across 10% to 20% of the workforce would imply for new dog or pet ownership Brett.
Oh, Yeah, Ryan we've looked a lot at this of late Unfortunately, the data is very sketchy data on pet adoptions, there's also pet fostering and the oftentimes get blended together as if there was the same thing and what we saw was a very significant uptick in pet adoption is at the beginning the koby crisis, but you can.
Can't manufactured dogs overnight and so we saw was the shutters were empty and breeders no longer had dogs and so the adoption and rate dropped fairly significantly on the back side and so it looks like there was a pull forward on pet adoptions. When you add in the fostering it looks like it's a little bit more balanced.
But in total we think that there's probably a pull forward of of dog adoptions in that you know gave us a little bit about a tailwind early on but in a grand scheme of things, though if you think about the number of net new dogs are out there. We think there's 63 million dogs in you know in the United States and if you added a couple of hundred thousand from these incremental adoptions it real.
He doesn't materially change our opportunity.
You know we were pursuing from you know being in the 3 million households that we're in and we're trying to get ourselves into 8 million households by the by 2025 and a couple hundred thousand extra doesn't really change that opportunity in terms of time at home spend at home, we think that certainly reinforces the value of of Freshpet.
And the value of the relationship you have with your dog and there's no doubt that's driving people to reconsider their pet food without a doubt Oh, we're seeing that you know over and over and over again, they have time to research it they really pay attention to and think about their their pet and we think that's that's helping us and we don't know how long that phenomena is going to be around and how much of its going to stick, but wall. The sun shining we're gonna.
Hey.
Great. Thanks, that's very helpful and I know I know that you have a you know many price tiers pure portfolio, but if we're in a particularly negative.
Economic environment and it stays more entrenched do you have thoughts and strategies about mitigating the negative effects for your business on the consumer start to trade down would that be lower priced innovations or do you have any other strategies that might be able to a better deal with that.
Yeah. So if you look at first of all the data we've seen historically said that premium pet food does very well in a down a economy. We've looked at that back from the 2789 10 period.
We will see again, what happens now we're monitoring our consumers and asking questions on regular basis, and we publish that in some of our investor materials earlier. This year, where you know if you lost her job or you had a significant reduction year pay what would you do and what we're finding is that really aren't seeing a whole lot of people who are trading down I've actually heard some some.
Retailers talking about people, who are trading up and I think that does happen to Oh, we do have a wide range of price points. If you want to buy freshpet at the low at the lowest cost you buy a larger size role and you buy it any grocery and mass outlet and you can get the price per pound or the price no cost to feed at a very attractive level, although at a more premium items, but if you look across.
Our lineup the things that are growing the fastest why the most premium per pound item. So it's really not we aren't seeing it a any evidence yet today that consumers are trading down for value.
Thanks, that's it for me thanks.
Thanks Ryan.
The next question is Robert Moskow of Credit Suisse. Please proceed with your question.
Hi.
Yes.
Well Hari asked my my adoption questions, which is top of mind.
Oh Slide 16, I was surprised to see.
Data showing that that the the wet and dry dog food category is down without fresh Pat.
For the last 12, 13 weeks and four weeks I was that your business is doing great. So this is this is all separate from your business, but are you surprised that the skills or for the rest of the category is weak given the fact that everyone is taking more time at home and presumably.
Building on their dogs one.
Yeah, I, you know Rob what so you're seeing there as the business that moved online that's in measured channels that doesn't include the online and people moves online.
I didn't come back.
Got it okay.
Thanks.
Thanks, Rob.
The next question is from Jason English of Goldman Sachs. Please proceed with your question.
Hey, good evening folks thanks for slot man and did a very sincere congratulations for everything you've accomplished sharing game and your prior career path will certainly.
Certainly Miss working with you are going to basis hope their past cross once again.
Thanks onto my questions.
You guys just mentioned the work you do and analyzing the past recession.
On the same work and we should assume conclusion, but I appreciate that that data has a lot of noise in it because they followed on the wake of the melamine crisis, which I think cause like a hypersensitivity with consumers and really sparked a pretty aggressive trade up I'm right into the recession have you been able to look at any other periods in time, where perhaps eating habits intrepid distortion.
And if so what have you found in the analysis.
Unfortunately, I, it's gotten might have a point of view on this I I haven't seen another period of time, you could look at like that but the one thing that I would comment on that particular analysis. If you look at the number of dogs in households during that same period. It also went up fairly considerably over that time period. So it's not like people were cutting back on paying.
For a feeding dogs are having dogs in their household and choosing not to replace the dog. They actually were more dogs in the household so I understand the point about the melamine, but you put the two facts together and says that people are still interested and feeding their dogs.
That's interesting Nagel, Scott you see that.
Yeah, I mean, I I think that what you're seeing here is kinda rooted in a really fundamental trend and how people think about food and how to eat and I mean, you probably heard me say this before but if you decide to buy organic milk for your kids. It's probably the last thing that goes and I I think people will kind of state height I'm not only the current.
People, but I think people that are concerned about kind of eating healthier.
Food is gonna be you know really the last thing that will kind of be impacted I I think that's kind of the core thing to keep in mind when you're when you're looking at the.
Yeah. My intuition is the same.
Asked to create skepticism just more out of curiosity, if you thought some other data points.
Well I do have a degree of skepticism. However is going back to the virus, which you've obviously got quite a few questions on and the ability to grow up by 50% of from 2019 to 2025 and I think I think so my skepticism has only been enhanced recently by the stay at home duration, where I realize me as a loyal fresh packaged.
Tumor with three dogs.
I'm capped out capacity and I can't buy more fresh out because I don't have more room in my fridge and while I'm staying at home my French capacity has become incredibly scarce incredibly precious.
So we've talked a lot about your manufacturing capacity was talking about how you expand that we'll talk about how you expands the the in store capacity was fridge network, but is there a real at home capacity issue that we should contemplate as a potential gating factor of how big this business can be over time.
I know Scott when you look I think.
Yeah, I think that there there are some people like if you have to large dogs and you're trying to pretty fresh Pat I can understand that it can be a challenge you know as you know people shop, you know up to two times a week, maybe up to three times a week, depending on who you are and where your shopping as were available in more places. The there's obviously more you know more off.
Since the to buy Freshpet.
But if you do kind of look at the virus. It's pretty interesting you know were $130. We're we're you know we're excited about that but if you said, even a 30 pounds dog just freshpet over the course of a year or even the majority fresh that you'd be in a five six $700 range. So you know with its kind of smaller and medium dogs, it's very easy.
The two kind of see a cap on the buy rates now the other thing that barely touched on earlier, but I think is an important point is if you look at the products that are growing the fastest and we've had the most capacity constraint on for the most part or higher end more expensive products.
And those are the ones, where I'm now there's a ceiling on that's like it you know there's not infinity, but we do and what were you able to thing there is kind of a more kind of top top end room for us from a price points standpoint, and it's not just we're charging more were offering different features and benefits interpreted the convenience different product offerings.
Et cetera, and you'll continue to see us bring those items and you'll look at them overtime and I think you'll walk away feeling pretty good about the additional values that are that will be offering in something new and the new innovation that's coming over the past. The next 12 to 18 months.
Okay interesting last question for me I'll pass it on Scott you guys Youve consistently shown the relationship between sales and advertising, which is clearly if the type relationship and it's a very scarce relationships in terms, what we see across the industry overall, the if you're approaching media budget levels that are pretty full for a single Brad.
Business at what point should we began to become concerned about the diminishing returns or or dk on the on the efficacy of that advertising spend as you continue to scale further.
Yeah. It is actually its a really good question and are both our media tiny agency in our marketing team have done tremendous work around that we've actually.
Done media plan, all the way to north of $100 million and we looked at the different things that we'd be adding over time and how we continue to expand and you know if you look at all the offerings out there today not only across TV, but different types of different dayparts a different types of networks that we participate in.
Digital advertising expanding our our target towards not just you know we have certain women targets, but expanding out into other like real opportunity target and even into men. We feel like the biggest threshold that we crossed was actually the 30 million dollar threshold, which will will cross thing this year.
And we're worried about diminishing returns now it isn't unique here, but we were seeing great returns at higher media level prior to covert.
So the testing that we had done a really demonstrated that we can do that and the goal with what we've done from a median standpoint, if we want to be at least 12 months out on on what we're testing and media and we want to have 12 months of creative and we also I want to have 12 month of of media plan tested board, we tested kind of what we're doing now.
Now should the test that we've done should apply into the media level that will run next year.
I think as we get you know kind of north of I guess 70 million would probably be another big threshold for us and that's where we get kind of looked at expanding the target into a a couple different new arenas.
Great. Thanks, Thanks for all the answers I really appreciate it.
[noise]. Thank you.
The next question comes from actually Hawkins of Jefferies. Please proceed with your question.
Good afternoon, and congrats on a quarter I'll just a quick one from me any update on the international business and where are you on the marketing your marketing African those region. Thanks.
Thanks, Ashley as we said last quarter, the cobot crisis hit the Canada and UK, our two international markets pretty much in a similar fashion to the you asked in terms of it arrives people flocked to the stores. They ran stack the stores. The stores go to people go on shelter in place. So there's not a lot of changing and under.
Like in the U.S., where we are a fairly robust brand with very very broad distribution and then we could you know sit out the period and then come back on with the advertising a we were in a position where we really weren't going to get the benefit we expected to get from the advertising investments, we're making prior to the end we were doing really well we'd put the ads on the air It was driving that.
That's exactly the right. He thought we would but when people want to shelter in place. They you know, they're not reconsidering and try new brands. There just ordering whatever it is that they already by so I think we've got to do a little bit about readjustment in reset and start again next year with what we're trying to accomplish this year. The good. The good news is that a we can meet all of our goals off of our U.S.
Based on food business, that's we've laid it out the bad news is it needs. We're gonna have to you know reset and restart next year to accomplish not all but we didn't want to do this year, because we didn't make some pretty good progress but to make as much progress as we would have liked it frankly, it got completed the interrupted and perhaps try again.
Okay, great. Thank you so much and congrats again.
Thanks.
The next question is <unk> Brian's Blaine of Bank of America. Please proceed with your question.
Hey, good afternoon, everyone.
I just have one question and its related to I think you referenced in the in the pivot a that one of the actions you took the six stores was you took on some incremental retail coverage and so I guess my question is twofold. One is that a more permanent change and second putting aside you know the immediate.
Oh, just having to kind of fixed the stores is there a benefit you get now from having incremental coverage and I guess.
You know would that actually sort of enhance.
No what you're building out in terms of the cooler placement and sort of the you know the boat you're putting around that business. So trying to understand if that can be more permanent and if so does it really create a a competitive advantage for you at the point of sale.
Scott you want to take that.
Yeah sure.
So so the when when we saw what was going on with Cove. It in that labor was the lever in the stores was literally just not even to actually get the shelves into the right condition, we need to kind of jump in help out and get our business corrected quickly and then that's where we followed on with the media now your questions are really good one and we've tested all different.
Level of retail coverage, we've tested it with different cadences, a with different with different partners.
We we've tested like trying to get returns.
The one thing I will tell you is what we've found is a we now we currently have a system, where we get tons and tons of visual every theories of retail coverage that we have and then we do as things that are continuing to have problems, we actually put more effort on onto correct goes and make sure the stores.
Get trained where we're moving to in the long term is to actually have digital pictures that are stent upload into a cloud every single night using artificial intelligence to evaluate what the stock conditions of that for jar, which is really really interesting we're into a test its going well and it's working you know distinct.
Next is really what we're actually progressing really well and we think that's the end state board and a really nice thing about where we are and where we're going is as we grow and there's more and more sales per store. It changes the ROI on a lot of the different things that we might do at retail so whether it labor or whether its technology. If we're still.
You know years ago, we feel $75 a store and now were $150 per store and it really changes the economics of looking at and that's dollars per store per week I really changes the economics on looking at putting resources behind it. So I think it's a good question I don't think we have a a final answer well, we do want to make sure that we are in the best.
Profitable position, we can at retail at all times and then if we can get a return on something where we want to continue to invest in it.
Let's not in that in that instance, the fridge would take a picture of itself. It's like a selfie that gets uploaded to the cloud <unk>, yes, we've actually been able to develop technology that would take a picture of the inside of the bridge and think think the rear view mirrors on your car that you know the backup mirror the backup camera.
Or the mirror that are the cameras that are on your rear view mirrors or your slide mirrors or whatever that can take incredible angle. So we've been able to be able to take pictures of the inside of the for isn't that technology that we're working on and then we're actually using artificial intelligence and facial recognition type software to identify which product.
Is actually out of stock so what we're going to get really smart on this overtime.
Thank you.
Thank you Brian.
[noise] there are no additional questions at this time I would like to turn the call back to Billy Cyr for closing remarks.
Yes. Thank you everyone for your interest obviously, congratulations to deck for delivering a heck of a quarter and a heck of a business over time I'll give you. The one final thought and this is from Dean Koontz says once you've had a wonderful dog a life without one is a life diminish two which I would add reward that wonderful dog with Freshpet and some loved and you can call.
Steven Thanks, everybody.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.
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