Q4 2020 Freshpet Inc Earnings Call
Greetings and welcome to the fresh Greg, Inc, fourth quarter and fiscal year, 'twenty and 'twenty earnings call at this time.
All participants are in a listen only mode. A question and answer session will follow the presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host Jeff Sonic <unk> director of Investor Relations with ICR you may begin.
Thank you and good afternoon, and welcome to fresh Pet's fourth quarter 2021 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Heather Pomerantz, Chief Financial Officer, Scott Morris Chief Operating Officer will also be available for Q&A.
Before we begin please remember that during the course of this call.
<unk> management May make forward looking statements within the meaning of the federal Securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements. Please refer to the company's annual report on form 10-K with the SEC.
And the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied and any forward looking statements made today. Please note that on today's call management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA among others, while the company believes these non.
Non-GAAP financial measures provide useful information for investors at the presentation of this information is not intended to be considered and isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release on how management defined such non-GAAP measures a reconciliation of the non-GAAP financial measures to the.
The most comparable measures prepared in accordance with GAAP.
And limitations associated with such non-GAAP measures. Finally company has produced a presentation that contains many of the key metrics that will be discussed on this call presentation can be found on the company's investor website managements commentary.
We will not specifically walk through the presentation on the call, but rather it's a summary of the results and guidance and we'll discuss today.
Now I'd like to turn the call over to Billy Cyr, Chief Executive Officer.
Thank you, Jeff and good afternoon, everyone I'm speaking with you from Bethlehem, Pennsylvania, the home of the fresh pack kitchens.
And Scott and Heather are in our offices and Secaucus, New Jersey, we will do our best to not trip over each other on the call and as always please excuse any barking in the background and any other technical issues we might encounter.
And it's hard to believe that one year ago, we gathered with many of you at NASDAQ and New York City to outline.
And our five year strategic plan and what are your at was I'm. So proud of our team's resilience through these trying times. Unfortunately fresh pet was able to navigate the shifting environment, while still making significant progress against our long term strategic goals and fact, the last year. Despite its numerous challenges has seen an acceleration.
<unk> of our business progress towards our 2025 goals as such we're going to update those long term goals to both reflect the fast start we had in 2020 and also to include the impact of some of our most recent learnings.
But first I wanted to go back to where I started our investor day presentation, one year ago.
And that press.
And I sort of that fresh pet had the potential to join the pantheon of iconic brands that changed the world.
Does that change things, we do every day and reflected significant changes and societies values and priorities brands at leverage technology to make the previously impossible possible where more broadly available.
And tastes like Nike, Starbucks, Gatorade, Netflix and Apple.
It may have seemed like a lofty ambition men and to be clear it remains a very lofty ambition today.
But fresh pad is on that path and accelerating.
<unk> is changing the way people feed their pets that change reflects the fundamental shift and how society.
Brands, both pets and food are.
Pets are no longer creatures, who sleeping dog houses and backyards. They are the favorite child, who sleeps and our beds and our food needs to be fresh and natural not dehydrated and preserved.
Those fundamental changes and societies values and priorities are here to stay and fresh pet will lead the transition.
Fusion to fresh and natural food for our pets.
Like those other iconic brands that changed the world Fresh pet is growing quickly from our infancy through our juvenile and pre pubescent years towards the teenage years, and then to adulthood and.
Many ways fresh pay dislike and 11 year old boy, who were size 15 sneakers.
He is growing really fast and everyone expects them to be big but along with that explosive growth. There can be some awkwardness. Our challenge is to do everything we can to achieve our enormous growth potential while insulating ourselves from some of the bumps along the way.
And pursuit of that goal I think it is worthwhile to highlight a few of the critical achievements.
<unk>, we had last year that demonstrate both our capability and the foundation that we're building to achieve even greater goals.
Number one we accelerated our growth for the fourth consecutive year, posting 30% net sales growth for full year, 'twenty and 'twenty and ended the year with 38% consumption growth in Q4.
Number two increased our adjusted EBITDA growth rate for the third consecutive year growing adjusted EBITDA by 61%.
Third we increased household penetration by 24%, reaching almost 4 million users for the first time and increase the buying rate by 7% at the same time.
Before despite the retail challenges presented by Covid, We added 1100, and 46 net new stores and more importantly installed double fridges and another 1600 40 stores and upgrade at 795 stores.
Five we doubled our installed production capacity and broke ground.
Number of objects that will result, and a tripling of our capacity by the end of next year. Those capacity additions included completing the construction and startup of kitchens, 2.0, adding more than $200 million and new capacity with significant increases and automation and breaking ground on kitchens, three point O and and as Texas.
We also opened kitchen, south and conjunction with a long term partner.
And sixth we increased our organization headcount from 450 to just under 600, including the hiring and Onboarding of three important new leaders Heather our CFO can be macabre, our SVP of HR and Ricardo Moreno.
On a per new VP of manufacturing.
And each case, we were able to attract first right talent because of the power of the fresh pet proposition and the opportunity to change the way people feed their pets.
We got all of this done while sheltering in place working remotely and devoting significant energy to protecting the safety of our team.
And I'm incredibly proud.
Proud of the number of people, who stepped up and played a critical leadership roles for our company when the situation required at <unk>.
They demonstrated the quality that should give all of us confidence that we can overcome almost any obstacle and achieve great things.
And like that rapidly growing teenager, I mentioned earlier, there were some awkward moments too.
And now we struggled to keep up with demand and ended the year with nearly empty fridges and many stores.
That means that we are spending the first quarter of 2021 digging out of of trade inventory hole, we dug rather than putting our foot on the gas to grow faster.
The good news is that we were making great progress against that since January one of our manufacturing.
Factoring output has grown and it is now averaging 26% more per day and during Q4 and it is accelerating.
Other than the week of winter storm or Lena our production has outpaced consumption each week since January of <unk>, enabling us to steadily refill the trade inventory hole it will take until mid to late April to REIT.
Opposite but our capability is growing quickly and we are confident we have built sustainable capabilities that can support the near term and long term goals, we have set for ourselves.
To help manage consumer expectations around the empty fridges and Scott as the co founder and COO has been posting letters to our consumers and social media.
Explaining the reasons for the empty fridges and outlining our efforts to refill them there.
And the support we've gotten from consumers has been largely positive not only for the efforts. We are undertaking but also for the transparency with which we are updating them and also the value we have been placing unemployed and safety in the face of Covid that isn't.
<unk> and some of the out of stocks even told people that we are hiring and we were only hiring people who are willing to work they would be paid and treated well, including stock grants and the same benefits. He has he provided them with a link to our hiring and website consumers loved it, particularly the part about how we treat our employees.
Consumers who are seeing.
Social media posts are even more attractive to fresh pet than ever before because they realize we share their values and this experience also highlights how our team moves quickly and innovative way to solve their most pressing challenges.
The improvement and our supply position that began in January is due to exceptional work by our HR team at filling.
And you can see and recruiting incremental staffing to backfill behind employees, who are out for testing requirements related to Covid and.
As we previously discussed you will see some of the cost of this added labor and our adjusted gross margin early in 'twenty and 'twenty, one, but we believe that it is necessary to provide our consumers and customers with of pet food they need.
Filling vacant and we gave you a preview of our 'twenty and 'twenty results earlier. This year when we presented at the ICR Conference I will leave it to Heather to provide the final details on Q4 end of year I will instead focus my comments on where we're going in 'twenty and 'twenty, one and our longer term goals.
We've taken some time to analyze of 'twenty and 'twenty results and all of the consumer.
<unk> data, we gathered during the year and total at presented a very encouraging picture of the long term opportunity for fresh pet.
And when we met one year ago, we shared our plan to convert 5 million more households to fresh pet by the end of 'twenty and 'twenty five getting to 8 million households, and total SMB.
And as ambitious as that sounded a.
A year ago, we were well ahead of schedule and in fact, we were almost one year ahead of the pace, we needed to deliver 8 million households, what's more we did that despite pulling back on our advertising investment spending only about 10% of sales instead of our target of 12% and significant out of stocks that made it hard for consumers to find our products at.
Yeah.
If we simply continue to grow household penetration at the rate we have for the past two years or <unk> 24 per cent for the next four years, we would exceed our 8 million household goal one year early and by a wide margin.
Think about this and a different way if we returned to our pre COVID-19 era of customer acquisition cost.
At time of about $50 per consumer and invested and media at our traditional 11% to 12% of net sales rate. We believe we would also greatly exceed our 8 million household goal.
This and other analyses proved to us that we could achieve a far higher share of the greater than 20 million household total.
But the household total addressable market or Tam that we'd outlined and do it at a faster clip.
Further while we have not rerun the study to determine if the Tam has grown we believe it is highly likely that the Tam is larger today than it was when we ran the study more than a year ago. The number of millennials and Gen Z who have entered the household formation.
And stage of life and acquired of dog is growing quickly and they are our best prospects for future fresh pet users, we saw that powerful dynamic play out in 'twenty and 'twenty.
We also share some compelling buying rate cohort data at the January ICR conference that demonstrated how our underlying buying rate grows.
And over multiple years, and ultimately reaches more than four times a year one purchase rate that.
And that data was like the Rosetta stone for us unlocking and understanding of our long term potential and the other way that we had not been able to do before the.
The combination that household penetration growth and buying rate data convinced us that the market.
Market demand for fresh pet over a foreseeable timeframe was much bigger and could be realized much faster than our initial 2025 goals suggested.
The only limiter to our ability to achieve that opportunity would be our ability to build capacity fast enough to satisfy demand.
Given that we spent much of the year working on ways to accelerate.
Accelerating our capacity expansion, we did the following first we prove that we can construct and startup kitchens to point out successfully.
Even under the severe limitations and potent posed by Covid.
And kitchens to point out also proved that we could create and operate higher throughput lines with more.
Imation that drive better margins.
Demonstration of our technical capability is an important proof point for us and the higher capacity of those lines is very encouraging.
Third we started up operations with a long term partner at kitchen, South initially installing one of our lines and a dedicated facility that they offer.
Operate and ultimately expanding that to of two shift operation capable of producing about $50 million per year.
And since expanded that relationship by committing to install a second line.
By the end of 'twenty 'twenty, one we will have $100 million of capacity operating at that partner and of proving the strength and durability of that partnership.
And are ready to expand it further to enable more rapid capacity expansion.
Fourth we broke ground on our biggest project, yet and that's phase one.
We built and trained and entirely new team capable of designing that facility in conjunction with our kitchens experts and Bethlehem and some long term engineering partners.
And are on track to open that facility next year, and initially bringing on at least $400 million and capacity and the ability to add a second phase that could add at least 500 million more.
Fifth we installed and are operating a smaller scale line that supports meaningful product innovation, such as home sale creation meals.
And.
We significantly advanced some new manufacturing technology that has the potential to produce more fresh pet and less space.
Potentially lowering our future capital costs and increasing the capacity of some of our existing facilities to be clear, we are not ready to deploy that technology, yet, but we're working to qualify at four N.
And its phase two and for future project at kitchen, South that I'll discuss in a minute.
Even with all of that capacity installed or under construction, we think we will need even more to satisfy the demand for fresh pet.
We think the long term opportunity for fresh pet is well north of $2 billion and that we will achieve more than our original goal.
Of $1 billion in 2025.
So today, we are announcing that we are raising our long term goal from 1 billion and net sales and 2025 to 1.25 billion in 2000, and twenty-five and simultaneously increasing our household penetration target from 8 million households to at least 11 million households by.
One of five.
Due to the rapid increase and new buyers. We are anticipating we are holding the anticipated buying right at about $162 per household per year.
We're also holding our adjusted EBITDA margin target at 25% planning on investing at the incremental G&A savings from added scale and.
'twenty tunnel capability for growth, including international staffing and more R&D plus some modest margin dilution from having increased production through our partner at kitchen South.
Our updated long term plan would deliver a CAGR through 2025 of 31% and net sales 23%.
And incremental penetration and 7% and buying rate all in line with our 2020 actual performance, which we achieved with less marketing investment significant out of stocks and broad scale disruptions at retail.
Basically what we are saying is that we think that we have the tools and capability to repeat that performance.
And we had in 'twenty and 'twenty for the next four years.
To deliver that we will need more capacity sooner. So we're taking the following actions to accomplish that.
First accelerating existing projects. These include starting up our second line of at kitchen, South and Q3 of this year, rather than Q4, and secondly, pulling forward.
Forward the startup of our <unk> facility by one quarter targeting to open in Q2 of 'twenty and 'twenty. Two instead of Q3, we are now paying for extended construction hours to complete the project early and have an incentive the contractor to get it done on time.
Secondly, leveraging the capabilities of our partner to increase capacity.
Capacity faster our partner has a deep engineering bench and has proven to be and effective partner over the past year. So we are developing plans to add the third line of kitchen, South that will enable some new product innovation and add significant capacity. Additionally, we have initiated discussions with them about adding another building with a capability.
At <unk> to produce another $300 million of product and are targeting to have that ready by the beginning of 'twenty and 'twenty three.
Third we're also increasing our estimate of the production capacity of the <unk> production lines to reflect the learnings, we're getting and kitchens to Plano and some further upsizing of the equipment.
Both phases of the and its project.
Capability of include the technology, we validated and kitchens to point out with some selective increases and the capacity of some pieces of equipment and total this will allow us to increase the anticipated capacity of the first three lines and and as phase one from $300 million that we had previously outlined to $400 million and the four lines and phase.
Project, we went from $400 million to $500 million.
And total we are building the capacity to deliver almost $2 billion of net sales by 2025 with some of it coming online sooner than previously planned to meet the accelerated near term growth rate.
To accomplish this goal while being mindful of balance sheet leverage.
Phase two we may seek to raise equity as part of our financing plans, we filed a preliminary prospectus supplement today regarding a potential equity raise and the goal of this raise is to ensure that along with our recent credit facility amendment, which increases our available debt to $350 million, our balance sheet does not become a limiter.
We are mindful of the total amount of capacity we are planning. So our plan does not call for us committing to the second phase of Venice until early 2023.
And that phase is planned to deliver $500 million of capacity at a cost of about $200 million.
Finally, let me turn my comments to 2021.
In line with the long.
Long term plan and the incremental manufacturing capacity, we have available to us our plan for 'twenty and 'twenty, one calls for another increase and our growth rate going from 2000, twenty's, 30% growth to 35% growth in 'twenty and 'twenty, one which results in net sales guidance of greater than 430 million.
The growth rate.
It will be a bit back loaded due to the two of the delay and our advertising investment and Q1 and the time, we need to rebuild trade inventories, but once those are in place we will be investing heavily to drive growth with U S. Advertising returning to 12 per cent of net sales for the year and includes slightly more of the U S media and the back half versus.
Cash.
This cadence is unusual for us, but it is necessary with the trade inventory hole. We are trying to fill first that spending pattern will also create significant momentum for the business at the end of the year and that is in part why we're pulling the N S project forward and adding a third line of kitchen South.
That will ensure that.
And we have adequate capacity as we enter 2022.
We believe that many of our leading customers will be matching that growth and investment with incremental stores and second fridges. Both later this year and early in 2022, however, both we and our customers will delay some new fridge installations until we can guarantee.
T that we can supply them reliably.
Our near term store additions will be reduced but the longer term store additions and upgrades will be very robust and total we expect to add greater than a 1000 net new stores upgrade greater than 500 stores and at second or third fridges and greater than 550 stores. This year.
And significantly more next year.
We believe the incremental advertising investment and the modest overhang from new capacity will cause the adjusted EBITDA margin to dip temporarily b. This year before resuming its upward trend in 'twenty and 'twenty two.
Underpinning that margin acceleration are two primary drivers continued.
Proven and G&A, which we believe will improve by approximately 220 basis points in 2021, and a resurgence and adjusted gross margin as we work through 'twenty and 'twenty. One we believe we will end of fourth quarter of 2021 at a rate higher than we achieved for full year 'twenty and 'twenty.
We have of solid portfolio of new.
New products, we are launching this year, we were adding a beef version two of wildly successful small dog product launching our flagship fresh from the kitchen product and the U K and launching a test of a plant based product and limited distribution and the United States.
And total I believe we have of compelling plan for 'twenty and 'twenty one.
And are very well positioned to continue accelerating the growth of fresh pet our team has demonstrated incredible capability. During some of the most challenging circumstances. We are inspired by our mission to change the way people nurse their pets and greatly appreciate all the support we've gotten from consumers customers and shareholders, while we manage our way through those.
And as challenging circumstances.
Equally important we appreciate the support of our team many of them, whom worked long hours with short staffing or remotely to deliver for our consumers and particular I cannot say enough. Good things about the leaders within our team who took on the responsibility for keeping our teams safe dance.
Spired confidence demonstrated Supreme professionalism, and navigated uncertain waters with the vision determination and flexibility needed to get us through this storm, we all faced all of us owe them a debt of gratitude. Thank you now.
Now, let me turn it over to Heather to provide more detail on our 'twenty and 'twenty results and our guidance.
And for 2021.
Thank you Barry and good afternoon, everyone.
As we disclosed previously net sales for Q4 of 'twenty and 'twenty well at all for.
And for a point of $5 million up 29% versus a year ago.
Actual of Nielsen Mega channel consumption was up 38 per cent.
We drew down and trade inventories again in Q4.
And final results were also constrained by a large snowstorm and mid December that cost us a few days of production and shipping with very few days left in the year to catch up.
As a result, we believe that trade inventories were $15 million below where we would.
And would expect them to be under normal circumstances at the end of the corner.
And really indicated we began refilling those in January and expect to have largely we felt the trade inventory by the end of April.
One of the most exciting and encouraging aspects of our growth in Q4 was the continued resurgence of the pet specialty.
One of them.
And some smart moves by our team and our customers and some overall tailwind for that channel are Nielsen and big box pet specialty consumption was up 43% and Q4, leading all channel.
And it was still accelerating at the end of the quarter and.
And Q1 of 2021.
And with each day, it is up greater than 55%. Despite some significant out of stock. We are encouraged by that progress and bullish on their prospects for 'twenty and 'twenty one.
Final net sales for 'twenty, and 'twenty were $318 8 million up 30% versus a year ago.
One of two consecutive year of accelerating growth.
This is a major accomplishment for our organization and we intend to extend this momentum into 'twenty and 'twenty, one by posting another yet another increase and our growth rate.
We think of this as walking before you run and running before you sprint each year, we increased our capability.
Our fourth to drive incremental demand and also build incremental supply.
Adjusted EBITDA for Q4 was $12 9 million down 2% versus the year ago recall, we had fourth quarter media. This year for the first time and that was one of the contributors to the flat adjusted EBITDA median.
And in the quarter was approximately $5 million versus approximately $2 million and the year ago quarter.
The other major challenge was gross margin due to significant losses and production caused by short staffing related to COVID-19 testing and quarantines and higher beef prices and the quarter our.
Adjusted gross margin was 45, 8% inline with expectations that we said at ICR.
Adjusted gross margin for the year came in at 48, 3% also in line with the expectations, we set at ICR.
We will begin to see some of the benefit of the higher speed more automated production.
And our kitchen of 2.0 facility.
Towards the end of 'twenty, 'twenty, one and I will outline and a few minutes.
We continue to deliver G&A improvements and the quarter with 130 basis points of adjusted SG&A of reduction after of splitting media investments and the quota for the year, we delivered 220 basis.
<unk> of lines of improvement.
Plenty of 'twenty also represents a broader accomplishment against our long term plans.
Looking back at the introduction of our feed the growth plan and 2016, we committed to deliver 700 basis points of adjusted SG&A, Excluding media improvement by 'twenty and 'twenty.
As our results show, we exceeded that delivering 780 basis points over the four year period. This execution demonstrates that our 'twenty and 'twenty five plan to deliver 1000 basis points of SG&A savings. Excluding media is very achievable, we know how to do it and have the discipline to execute.
Against it and there's still lots of room for leverage and our current cost structure.
Our final adjusted EBITDA for 'twenty, and 'twenty was $46 9 million up 61% versus year ago. This is in line with the guidance. We provided in May and slightly ahead of the updated guidance we shared at ICR.
And our net cash flow from operations was $8 1 million and Q4 and for the year, we produced $21 2 million.
Turning to the revised long term goals.
Billy outlined the increase and the net sales growth to 1.25 billion and 2025 and the rationale for it so I won't go into that.
Other than to say that target is based on our assessment of the U S. Based dog food opportunity, we remain very committed to developing and nurturing of meaningful cat food business and expanding our international footprint, but I'm not assumed disproportionate growth and either area and our nouvel.
And.
Our 2025 plan, we are holding the adjusted EBITDA margin target at the 25% with previously committed because we believe but by the time, we get there we will be investing and a European organization and incremental R&D to support a broader business platform we.
We see significant growth opportunities in both areas.
And we want the flexibility to invest organizational and resources to deliver those opportunities.
We also plan to increase capacity by leveraging the technical team and resources of our partner at kitchen South.
We see this as a critical enabler of growth. However, this will have a margin implication and the near.
Your term.
The Capex plan supporting our growth ambition is outlined in the investor deck, we published today at <unk>.
And we project and includes our one we are pulling forward the startup of N S and that will cost an incremental $20 million. It will start one quarter earlier, and Q2 of 'twenty and 'twenty two.
We are adding onsite chicken processing to the analyst project to improve both the quality and cost of our primary ingredient, we will build and own the building, but it will be equipped and operated by a third party chicken processor, delivering fresh chicken to our facility without any extra transportation costs and within our.
Two of processing.
At your chicken will deliver higher quality at lower cost for us.
Third the kitchen, South expansion project will come in two phases in the first phase we will enhance the plans we had for one additional line and build out that space to include a total of two additional lines. These.
<unk> will add net sales capacity of approximately $150 million.
And the second phase, we are adding another 300 million of net sales capacity and it and of relationship similar to the relationship we have and the first phase I E. They build their own building and we own the equipment. They will operate the building with.
Our state of team, we estimate that project to cost approximately of $100 million and be ready to produce and 2023.
Taking this updated framework around capacity and the capital expenditures that will support at I want to impress upon you that we are focused on driving positive free cash flow over the long term.
Of the Dirty and our business has been generating positive operating cash flow for the last several years as we've achieved scale and the business. Importantly, we are also on the cost of generating free cash flow, excluding the incremental capacity investments we've laid out today, however, giving me and given the amazing growth opportunity that were presented.
And what we will be more heavily investing and the next two years and as a result, we expect our free cash flow generation will be temporarily constrained until we reach 'twenty and 'twenty three.
At that point, we see free cash flow, becoming positive and then building from there as we move out towards our 2000 and twenty-five milestone of.
Resent at an 11 million households.
Turning to our guidance for 'twenty and 'twenty, one we plan to accelerate our growth again this year with significant amounts of new capacity now online and we intend to increase our advertising and investment to a more normalized approximately 12% of net sales up from approximately.
Reached at 10% and 2020 to drive accelerated growth.
We expect to deliver more than $430 million and net sales in 'twenty and 'twenty, one up 35% versus year ago.
The growth will be strongest in quarters, one three and four as we refill of the trade inventory hold and Q.
Approximately and we get the full benefit of the added capacity and incremental marketing investment and the back half of the year.
Q2 is up against some strong comps, where we refilled the trade inventory of whole last year and our delayed starts and marketing this year will push more of the growth to the back half of the year.
We will continue to make.
One Smith and our international business to support the momentum we have generated there behind the advertising reinvested and last year.
Those businesses, Canada, and the U K are now growing very quickly, but off a very small base.
That growth has stimulated strong interest from our customers and the expense and.
And expanding the distribution of fresh that to more stores.
<unk>, what we had hoped to accomplish.
As we have said many times it is a multiyear cycle of investing in advertising to drive velocity that results in incremental distribution and enables us to invest more and advertising.
The result is a very solid.
And validation of support with customers and loyal consumers and a rapidly growing consumer franchise and retail footprint that is our model and it is working.
We expect adjusted gross margin to be flat on a full year basis versus 2020, starting lower due to the added staffing costs and improving throughout.
And I found here as we gained volume to absorb those costs.
We are expecting modest increases and commodities largely be early in the year and generally flat costs overall.
Our chicken prices and locked for the year and it was flat versus a year ago.
We expect continued improvement and SG&A excluding media.
Delivering another of greater than 200 basis points on our path to our target of 1000 basis points by 'twenty and 'twenty five.
As part of our operational improvement plan and to support the scale of the business, we will be doing and ERP upgrades currently targeted for October one 2021, we.
We do.
We expect some freight inflation this year and that is included in our guidance.
We are forecasting adjusted EBITDA for the year to be greater than $61 million with the adjusted EBITDA margin dipping a bit this year due to the increased investment and advertising to drive a higher growth rate and afraid of inflation.
Also in 'twenty.
2021 we expect to produce continued positive net cash from operations.
In summary, our guidance for 'twenty and 'twenty, one is for net sales greater than $430 million.
<unk> 35 per cent versus year ago, and adjusted EBITDA greater than $61 million up 30% versus.
Yep.
While our liquidity is strong we have amended and expanded our credit agreement to include a delayed draw term loan of up to $300 million and a $50 million revolver.
As discussed we will all sorts of four one or more equity raises.
Depending on market conditions and other factors. So that we can fund our accelerated growth plan and not stress the balance sheet.
We have heard from many of our largest and longest tenured shareholders that they believe the long term opportunity for fresh that is too big to allow any potential short term issues to create risk.
So they prefer we maintained low leverage our plan does that with a target of approximately two times leverage and not more than three and a half times.
We believe we are very well insulated from the occasional market risks or hiccups, along the way and are well positioned to pursue the freshmen opportunity to.
At West.
In 'twenty and 'twenty, one, we anticipate spending of approximately $380 million and capital.
In closing we are incredibly excited by the opportunity in front of us at.
If anything 'twenty and 'twenty has shown the strength and resilience of our team under very challenging circumstances.
And its full of and its own strange way galvanized our organization to deliver even greater results as we looked at our revised 2025 plan.
We believe we have of winning consumer proposition and the tools to deliver it to consumers we have a deep pipeline of innovation being readied for the market the strength.
And of our marketing team and programs has never been better and our customers recognize the opportunity that fresh cut.
And we.
We believe that is a recipe for significant success and we are ready to achieve at that concludes our overview, we will now be glad to take your questions operator.
Strength.
At this time and will be conducting a question and answer session.
To ask a question. Please press star one on your telephone keypad.
Total will indicate your line is and the question queue. You may per start to if you like to remove your question from Q2 practices using speaker equipment and maybe they seem to think of your handset before question Mr. Keyes.
Be aware that this call will end at five.
30 P M Eastern time, and therefore, we and can only limit each participants of one question and one follow a portion of banking.
And more please pool for questions.
Yeah.
Yeah.
Yeah.
Yeah.
Okay.
And our first question is from Bryan Spillane with Bank of America Merrill Lynch. Please proceed with your question Hey, Thank you operator and a good day.
Your name and everyone.
So just to I guess high level question, Billy that we've gotten a few times are you know kind of at really since since ICR is just you know just stepping back now that you've you know you've raised of long term.
You know projection how do you how much of the.
At good out of acceleration would you attribute to Covid meeting.
Covid sort of pulled forward some sales.
And I guess, how do you I guess, how do you have confidence that it's not just kind of a pull forward versus.
And acceleration and expansion of the trends you were expecting a year ago.
Yeah. It's a good question, Brian 2020 was a mix of of some obviously some helps and some hurts the things that I would put them at helps would be obviously people spending a lot more time with their dog and caring for paying attention to the various needs of their dog, we had some lower cost media, but we had some.
And sort of in of hurts that occurred in the year that I think tamp that down and probably fully offset it. So the capacity limits that we had and the year were significant the retail disruption the inability to get fridges in earlier in the year, rather than later and having to push back our advertising and so we had to set at.
Net at all out and we net.
Significant out of our conclusion was that 'twenty and 'twenty might've been a pull forward not not just in the year, but of an underlying trend that was very very strong and is going to continue for a long time, we think like many people have described 2020 years at didn't create new trends at took the trends that already existed and just made them happen faster.
Well, we look when we saw that we realized at the upside was even bigger for us and you know, you'll see and the presentation and investor deck that we put out we did the modeling several different ways to confirm for us that this wasn't just a temporary phenomenon. There really was a long term underlying trend here and that's what got us ahead.
But we'd be so that's why we're raising the guidance okay.
Okay, great. Thanks, Billy and then just maybe just one follow up quick one the $430 million or better of of revenue for this year and and maybe I missed this and the presentation, but.
Hum.
So you have the capacity in place today to deliver that or is that dependent.
And Don more more production capacity coming online during the year.
All of the equipment to deliver that is installed at the staffing and we have a chart and the investor deck and mapped out by quarter. The staffing additions that we're making that enable us to deliver that so you will see quarter by quarter of what the capabilities are so you know we had a good.
Where are we at this year, you'll see we produced very very well and January if we'd get rid of the darn snowstorms that keeps slowing things down we're doing incredibly well.
But we have a step up and capacity from staffing perspective that happens in March we of another one that happens and the second quarter. So as you go along throughout the year, they're staffing additions, but the equipment's all of their.
Start just where we need to be there is of equipment coming out of line to be very fair. There is another line coming on at kitchen, South and the second half of the year, but that's really designed to hit the cover of at very high run rate and the second half and the fourth quarter of the year.
Terrific. Thanks Blake.
Thank you thanks, Brian.
Yeah.
And that'll get it and our next question is from Peter Benedict with Baird. Please proceed with your question.
Yeah.
Oh, Hey, guys. Thanks, I'll ask two just gave here. So the first one just bill you had mentioned the $50 customer acquisition cost.
The longer term plans and assumes you hold that just talk maybe a little bit about it.
And the puts and takes to that number.
So you could that could could either.
And they bring that down over time or just how you're thinking about that and then the second would be around the pet specialty.
Channel and the resurgence that you're kind of talking about there.
I think other you mentioned smart moves by some of your partners. Just curious what you think is going on there and kind of why.
What got specialty space might be of channel might be.
Relevant again, and I guess for lack of a better term. Thanks.
Yeah, Let me make one comment on the customer acquisition cost and I'll, let Scott give you more color on that as well as on the pet specialty channel the $50 as they were they sort of of long term trend we've operated at.
And why the bulk of below that so it's almost going back to Brian's comment just a question a minute ago, the customer acquisition cost and 2020 was significantly lower than that and our modeling going forward does not assume that it only shows that if you stayed at 50 $50, which at the number that we've delivered in the past that we would still greatly exceed our goal.
So it's.
And part of the long term trend, but Scott and give you more commentary on what causes that to get better or worse, and then and also talk about pet specialty.
Hey, Peter Yeah. So, it's really mentioned and we've seen a pretty wide range on our acquisition costs. This year, we continued to pull back and it was kind of one of those exceptional years, where.
A level, we have well exceeded what we anticipated the biggest factors that we see over time kind of pluses and minuses are consumer acquisition costs really center around how much innovation and how much visibility.
Visibility do we have out there so when we have good innovation and that's really appealing to consumers and we also have.
And then neither either highly visible.
Incremental distribution and they become kind of multipliers or force multipliers and away and actually drive our consumer acquisition cost significantly down.
What we have budgeted over time is to.
And had been budgeting seeing acquisition costs actually going up and we've seen at for multiple.
Years, now actually decreasing and we think some of that is the decider.
And this idea of as we get bigger and we have more visibility and people are more familiar with the idea of fresh pet food and it's actually become easier for us to acquire consumers also they're very you know people were thinking differently about nutrition and its really translating into.
Fridges and sort of pet universe now so that's a big factor on what happens with our acquisition costs from of pet specialty standpoint.
The bulk of the major of pet.
Big box pet guys.
And have really made nice progress and general on their overall business and they are kind of waiting with us.
And they put our fridges and higher profile of locations at a second fridges, and even third fridges and certain locations and.
We've also had some nice innovation there. So I think it's just a compounding effect of some.
And some consumer trends.
And Covid I think they've done a nice job with their businesses and we've had nice placement and kind.
And of incremental fridges being added in those channels.
Okay, great. Thank you very much.
Thanks Peter.
Our next question is from Bill Chappell with true Securities. Please proceed with your question.
Thanks, Good afternoon.
Hey can you just at an.
And kind of the postponement of of second fridges doors, and and doors and general this year. So I'm just trying understand is that because you're taking a step back and rethinking kind of the whole capacity expansion and so there's a little bit of a pause.
And at <unk>.
Hey, there just the cadence.
At near term issues with snow and stuff like that and just trying to others and.
Does that imply that there's slower growth.
Until that are up and running and just trying to understand the decision behind that.
So from a decision perspective. The decision is just we have to be able to supply the fridges that are out there and.
She and customers as you might imagine and seeing us a short shipping for quite some time and so it's not prudent for us to be putting incremental fridges and stores that they can't be stocked.
The long term interest and second and third fridges is incredibly high and the gains that we're getting from them are incredibly strong so of the demand.
And is it is very very strong we have no doubt that there will be significant interest and we just need to make sure that when we put them out there that they can be well stocked and frankly of our customers have the same concern to they don't want us to put up put in and something that they can't reallocate the space.
In the fridge to something else when we can't supply so we need to get the supply up.
And for by the end of April we should be and pretty good shape on on our.
And at that point, you can start seeing people doing more normalized activity, but theyre going to want to be comfortable that it's working.
So at Haverhill.
Yep.
And when you build on that real quickly. So just when we put in second fridges at just.
But to be clear on it and we're seeing so we're already growing at call. It 30%, we pick up anywhere between 20, and 40 incremental growth points on that second fridge. So the return continues to be strong pull for us and the retailer. It's also continuing into the second year. So we're seeing really good progress there.
Just two and one of the things that we've become not only at slowing down a little bit on some second fridges earlier and the year, but there are several retailers that are pushing some of their major changes towards the back of the year or not doing as much in store. This year due to kind of the entire whats going on and the marketplace and that could change we actually got some very positive surprises back.
And late in the back of last year, but we don't do not want to kind of weigh into that.
And I guess on that same note as a follow up.
30% growth and 2020 is great.
Obviously very impressive.
Any gauge now looking back for the full year.
How much was left on the table in terms of had you not had capacity constraints what that growth could have been at especially as we're looking to 'twenty 'twenty, one where you're at should be at full capacity for most of the year.
35% growth doesn't seem that aggressive.
If you left five.
Our of points on the table of last year, so any any color around that would be great. Thanks.
Yeah, it's always hard to.
Bill to decide how much you really lost I'd say, what we quoted was at the end of the year of the trade inventories were down by $15 million versus where we thought they'd be and against the base of sales.
Six of them somewhere around three or four points. So you could say pretty competent there would have been three or four points more.
For that and know how much you want because of consumer work and the store confined at and they had to buy something else or a new consumer who came to your fridge based on having senior at and showed up and Theres, nothing and the fridge or not not the item they want it.
That we really didn't do any modeling to figure out what that could be.
But if youre, telling us that having 35% growth is is sandbagging or there's a little bit conservative I would tell you is we're very we're very mindful of the fact that we need to run at Heather said walk before you run run before your sprint, we want to kind of amp up the growth as we go along.
It make sure we can supply at.
Yes, no and one other one other factor sure one other factor on that too Bill is at the entire year, we kept canceling more and more and more media and.
In addition to us not having enough product. So if we had spent the media cross all of those factors in place.
<unk>.
Along and we're encouraged that we could be seeing some pretty significant growth rates.
Got it thanks, so much.
Thanks Bill.
And our next question is from Brian Holland with D. A Davidson. Please proceed with your question.
Yes. Thanks, Good evening do we continue to assume.
Assume media will be 12% of sales through 2025, and just if I could throw on top of that given the increased flexibility by out of capacity could that go higher.
As we've always said.
When we have capacity, we want to fill at the <unk>.
And that we've laid out gives us the ability.
And always be at.
And once we get this next increment of capacity and to be align or so ahead of where the demand is so we don't get ourselves caught where we're short on supply.
But we do plan to spend at 12% of sales.
Between now and 2025, so the real question will be does at over delivered the returns because it.
82 letters of the returns that we then have us using more of the capacity and that's why we're building and the incremental capacity to stay ahead of it. So we don't have that supply problem.
Okay Fair enough and then you've got a lordly share of this segment of the pet food category and one that has to be increasingly difficult part of the larger.
At overdose of ignore so as you guide out to 2025 and make plans at capacity Accordingly to what extent have you factored in the evolution of the competitive landscape.
Obviously at the factor I've seen lots of studies done on what happens when a category creator ends up with.
Players a challenger obviously at a lot depends on who the challenger is and what the approach is that they take do they come in with a knockoff product at the same price do they come in with a more premium product and they come in with a price driven product, but typically what happens is when a second player interest of the market at significantly expand the rate of growth.
With ice and the market and so while your share of the market might go down.
The size of the opportunity that you have is actually quite large and so while we fully anticipate at some point, we will have a competitor, it's only natural and so what we should expect at.
Our expectation is it will be make the category and more competitive not necessarily.
And of our art.
Our business opportunity smaller.
I appreciate the color best of luck.
And our next question is from Mark assets.
After Chen with Stifel. Please proceed with your question.
Thanks, and good afternoon, everyone.
And maybe a different way on the new store add so I guess that was a little surprised that you are talking only of.
And stores or so and I wanted to ask kind of specifically about how the discussions are going with some of those retailers like Walmart and Kroger at Costco, where youre under stores relative to where you could.
I'm wondering where you are at places like target and so.
And how has the out of stock situations.
Manifested itself with some of those and how do you think about the other specs just broadly obviously some of your.
Retailers are also put stickers on doors to say hey, there are alternative products elsewhere.
Maybe just.
Could be enough to bid on some of those discussions.
With the legacy retailers and if I could just at a sort of related points of that what are your expectations and bad for non traditional retail, meaning like chewy or Amazon within the base.
Yeah.
Got you and take that.
Yeah, So mark.
And like no one likes to be in a situation where.
And that we can supply.
And as much as not only of consumers, but also of our customers want and obviously frustrates the customers, but I think if theyre looking across the entire store, especially episodically over the past year, it's been incredibly incredibly challenged.
And timed and I think that people been fairly understanding and most of them have been very very understanding and really really good partners and I think some of that come from the equity that we built and working with them and being as transparent as possible for the past 10, 15, and even 20 years and some cases and <unk>.
And that we worked with throughout throughout our careers.
Challenging but.
Look I think the other thing is people really really appreciate and love the growth. They love the the margin that we're continuing to deliver to the category and.
But I do think they have expectations of us, making sure that we're getting them back and a better in stock position. So they.
And can deliver to.
<unk>, our consumers and their consumers quickly.
And they don't plan, we've had many many meetings many many top to tops with them kind of walking through exactly what we're doing.
Again of really sharing force because they love the proposition and how we built this business and.
And what our long term vision is and where we can grow.
And there can sort of we can go over time and I.
And I really think overall, they're behind US I think that there are some near term pain and everyone sharing that but they recognize it as a quarter's worth of pain, it's not a year's worth of pain.
That's helpful and then just on the.
And non retailers of the Internet E. Commerce piece, how are you thinking about that guidance sure and I think there's actually a page in the deck that talks about E com, it's actually page.
And.
12, I believe GAAP page 12, and although we we've had a lot of success with what we've done.
And from an E com perspective, we've and we understand and really really well how to invest how to grow with of productivity is versus our traditional advertising, we're actually getting better returns on the E com advertising than the than the traditional advertising.
That encourages us to spend.
Spend more and that area. So we will be spending more and we will have significant incremental partners that will be adding from an ecommerce standpoint over this over this next year.
Thank you.
And our next question is from Jon Andersen with William Blair. Please proceed with your question.
Hey, good afternoon everybody.
Yeah.
A couple of quick ones.
One of you know.
Related to the out of stock situation. How do you think what has been the feedback from your customers you know Bill you talked about.
Empty fridges do.
Do you think.
There.
There are longer term ramifications from that have you seen.
Users, maybe kind of fall out of the franchise it'll be.
Hard to hard to bring back so just some thoughts on that based on the interactions you've had with customers and then the second question is just around.
Your kind of view of the new product lineup.
2021 and characterizing at.
Maybe relative to some of the innovation that you've done over the past couple of years. Thanks.
Yeah, I'll, let Scott take those.
Yeah, Let me talk about the innovation piece first and so were.
It's interesting.
And because a lot of people would say well you're growing at 2025%, 30% 40% growth.
Why are you bothering to innovate well well as Billy at someone brought up earlier, we believe that some point people will want to be coming into this category and we want to have the absolute best product and anyone can possibly imagine and be basically cutting the territory.
At Torrey.
And cutting the kind of ahead of the swap through the jungle and.
And coming out with the absolute best product out there now that being said innovation is not just something that's kind of like a fund side project, we've been able to demonstrate year after year that the innovation typically sticks very well the vast majority of renovation over 80% of our innovation sticks around.
Around multiple multiple years out.
A significant contributor to not only improving our advertising, but also of our overall sales growth and the size of our business over time. So we do believe innovations of core of it and then we have kind of a we want to improve our current products, we want to innovate.
Meaning coming out with like varieties and flavors and maybe some incremental benefits on some of our existing or with some of our existing technology, but we're also working to truly reinvent and come out with like next level of category changing technology like Youll see Theres, a new plant based meals were coming out with some of its positioning work that we're doing.
Where we will have.
The most sustainable pet food, that's out there and our natures fresh brand and some of the things we're doing and our homestyle brand. So innovation is really critical and core and it delivers on the out of stock piece. It's interesting it's unfortunate but interesting over the past 10 years there have been.
Times, where we have had challenges on our business and it's been sometimes it's been challenges and I'm, making roles are of challenges and I'm, making bags or packaging supplier of whatever it may be and the one thing that we have seen is the consumers and this business has been unbelievably resilient.
Do I wish we wouldn't be having out of stocks.
100% literally like like there is no way to tell you how much of my heart Bleeds every time I see of consumer frustrated, but if you look through those consumer comments and I've lived through thousands literally thousands of of consumer comments on the notes that I posted the vast majority of them are cheering for us waiting for us to come back and start looking for.
For us we're doing everything we can to help them and make it easier for them.
And get product out there as fast as we possibly can with notice of and spirit. So is it going to be a blip, yes, I'm sure it's going to be a blip and it's unfortunate, but I do think overtime, we of the by far the best proposition of anything and pet food consumers will come back to our franchise.
And we will continue and you just move forward.
On our on our growth trajectory.
Thank you good luck.
Okay.
Our next question is from Ken Goldman with Jpmorgan. Please proceed with your question.
Yeah.
Okay.
Okay.
Okay and Goldman your line is.
And if you have a question.
Yes.
Okay.
Ken Goldman.
And you May proceed.
Hi can you hear me now.
Yeah Yeah.
Yep Yep, we can navigate hearing other long long story not mute, though.
Hey, guys. So you're almost two thirds of the way through the first quarter, the street's modeling of little over $90 million and sales and about 10 million of EBITDA.
How closer of those to kind of what your expectations are for the quarter. If you can give us a little bit of a ballpark there.
So I.
Obviously, we don't like giving out quarterly guidance, but what we said in the and the narrative is that as you think about the cadence for the year Q1 should be a strong quarter, because even though we are delaying the advertising.
The startup we.
We are filling that refilling that trade inventory hall. So you can expect it to be a stronger quarter Q2 is up against a very tough year ago. Because that's when we are refilling the trade inventory and we have a delayed start of the advertising. This year. So it will be delayed and building consumption. So at W. Our softest quarter, and then Qs three and four will be very.
And because of the advertising investments that were making starting in Q2, but really paying dividends and three and four so without giving quarterly guidance I can just tell you that we're expecting at least from the topline perspective to be off to a good start in terms of the bottom line. There is a little bit of a delay and the advertising investment, but theres also of higher cost that we're going to be carrying because.
Because we are brought and incremental staffing to make sure that we could produce what we needed to produce we don't want to find ourselves in a position where.
Because of people being out for testing or quarantine or issues that we're having and how much snow storms that we can't meet the demand. So we do have extra staffing that we're carrying.
And at what level of long so I'll let.
A very striking.
Alright.
Thanks, Ken.
And.
And we have reached the end of the question and answer session and I will turn now turn the call over to CEO, Billy Cyr for closing remarks.
Thank you everyone I'm, sorry, we had to cut you short today. Unfortunately as you can imagine with all of the things we have going on.
And it has been a very at hectic day, but I did want to close with one of the one thought where you lose save and the football coach said no matter, how little money and how few possessions you own having a dog makes you rich to which I would add Peter Dod fresh pet and you can call at even thank.
Thank you very much for your interest and attention we appreciate it.
This concludes today's conference and you may disconnect your lines of at this time. Thank you for your participation.