Q1 2021 Freshpet Inc Earnings Call

Greetings and welcome to the fresh cut first quarter 2021 earnings call.

At this time all participants are in a listen only mode.

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'd now like to turn the conference over to your host Mr. Jeff The Sonic with ICR.

Please proceed sir.

Thank you and good afternoon, and welcome to fresh Pet's first quarter 2021 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Heather Pomerantz, Chief Financial Officer.

At Morris Chief operating officer of will also be available for Q&A.

And we begin please remember that during the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could 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 filed 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.

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-GAAP financial measures provide useful information for investors.

Dentation of this information is not intended to be considered and isolation or as a substitute for the financial information presented in accordance with GAAP.

Refer to todays press release for how management defines such non-GAAP measures a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures.

Finally, the company has produced the presentation that contains many of the key metrics that will be discussed on this call.

The presentation can be found and the company's investor website.

Managements commentary will not specifically walk through the presentation on the call rather it is the summary of the results and guidance they will 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 want to start by giving you. The punch line upfront the fresh pack kitchens are delivering the increases in output. We had expected and are now producing at a rate that is almost 50% above year ago.

That is enabling us to refill the trade inventory that we had drawn down during the back half of 2020, and satisfy our customers and consumers with much better in stock conditions.

We are not done refilling, the inventory and all of the Skus at all customers and we were getting close.

We are incredibly grateful to the customers and consumers who have stood by us during the supply challenges we had over the last six months.

And it's frustrating for our customers and not be able to provide their shoppers with the high quality and stock conditions. They pride themselves on and for consumers to have the search high and low for the fresh pet products at their pets have become accustomed to.

Our team has done everything they could to catch up the demand under very challenging circumstances, I can't say enough. Good things about the efforts of our production sales logistics and consumer care teams and their tenacity through the challenges of the past year.

The progress we've made has allowed us to get back to doing what we do best change the way people nurse their pets forever. Our advertising is on the air household penetration is growing we are launching new items and our customers are planning to install new fridges upgraded fridges and second fridges as a result of this progress and the strong fund.

The mental trends, we are seeing we remain very bullish on our prospects for both this year and for the next several years.

And you're off to a very good start in 2020 one despite the numerous challenges we faced and Q1, we grew net sales, 33% our strongest quarter of growth since the third quarter of 2015, basically we sold everything we could make and Q1 we.

We also grew adjusted EBITDA in Q1 at at rates slightly above net sales growth up 35 per cent versus a year ago.

Heather will provide you with more detail and color on those results I want to focus my comments on a few of the highlights and choices. We made the drove the results in the quarter and update you on our expectations for the balance of the year and early next year.

I want to begin by discussing the state of our manufacturing operations. Overall, we are doing very well delivering the commitments. We had made on both our near term and long term capacity projects.

As we have previously outlined we made several additions to our capacity last year, including of two shift operation at kitchen, South last June and the startup of kitchens to point out and October <unk>.

Alright, those additions are total output did not go up I E. We lost just as much I'll put in our existing kitchens due to COVID-19 testing and quarantine and as we gained from those incremental operations you can see this on the chart on page 36 of the accompanying investor presentation.

At December we made several interventions designed to correct that and the plan is working we're now getting the benefits of the incremental production capacity, we added last year and adding more.

Other than the two significant snowstorms in February we've consistently produced in excess of Nielsen measured consumption every week since January one of <unk>.

Got lost any production shifts due to COVID-19 and our April production was about 45% ahead of a strong month, a year ago and more than 60 per cent greater than was consumed a year ago.

We've now demonstrated the ability to produce at a level that will support the significant growth we are guiding to this year.

We've been able to do this because of work our HR team did to bolster our staffing we raised the wages for a night shift and recruited of flex pool of talent to both insulate us from any further COVID-19 related absenteeism and to further expand our capacity.

COVID-19 still exists and the Lehigh Valley community, where the kitchens are located so we are still incurring some COVID-19 related costs, we expect that to wind down and Q3 as of our entire team became eligible for vaccines on March 31, and we are strongly encourage them to get vaccinated if they can.

And we've provided incentives to our team members to share the vaccination history with us offering to incremental days of vacation and a 25 dollar cash incentive if they share the vaccination record with us and in the first two months. After the became eligible one day of vacation if they share at within the following two months.

Further while the state of Pennsylvania has not allowed companies to do onsite vaccinations, we hired nursing staff to sit and a break rooms for eight hours per day work with our team members to navigate the challenges of finding vaccination of appointments.

They have successfully found vaccine appointments for numerous team members at times and locations that work for them. We were thrilled with the success of this program and our team members are very appreciative that we made it so much easier for them.

While not everyone will choose to get vaccinated, we believe enough, we'll choose to be vaccinated to reduce our dependence on most of our COVID-19 related interventions by the end of Q3.

Due to our success and navigating these unusual and dynamic variables. We do not expect further supply interruptions. This year due to COVID-19 and as a result, we anticipate winding down our COVID-19 add back to adjusted EBITDA by the end of Q3, we are mindful. However of the future of COVID-19 is uncertain and there is the possibility.

<unk> of new variance the debate or vaccines further government mandated lockdowns and new unforeseen and supply chain interruptions, we will remain nimble always keeping the safety of our team as our top priority and we will communicate any changes to our expectations and a timely manner.

Looking forward, we remain on track at a new production line at kitchen, South later this year and another one early next year and construction of our largest kitchen and and as Texas is making good progress we remain comfortable with the timetables and we've communicated previously in terms of facility start up timing and the total production capacity each.

Those facilities will provide.

Further when N S opens next year it'll be another example of our ability to continually improve the manufacturing technology for fresh pack, creating higher quality products, and an attractive cost and and a very positive work environment kitchens.

Kitchens 2.0 was a major step forward for us against those metrics and this will be another step beyond that.

I also want to point out that we are constructing the N S facility with environmental sustainability and mind. For example, we've already poured and 3700 cubic yards of low carbon concrete that is concrete that uses fly ash to lower the carbon footprint that is saved approximately 100 metric tons of C. O two emissions.

So far and the construction of that facility versus ordinary concrete.

You can't replace all of our concrete with low carbon concrete, but where we can we are doing it.

We're also in the style of installing a variety of measures designed to both limit of water and energy usage, but also generate clean water and energy on site. We will provide a much more in depth review of our entire environmental sustainability and broader ESG effort. This summer when we release, our first ESG report.

The second topic of we'd like to address is the composition of our growth and the quarter as.

As we said when we provided our guidance in late February the year on year comparisons are not particularly meaningful due to the COVID-19 surge and trough and the base here and.

And the accompanying presentation, we attempt to provide a bit more clarity. So you can understand the various moving parts, including not only of the year ago COVID-19 impacts, but also the impact of our out of stocks this year.

The key points I would highlight are first the out of stock impact was most significant in mid February when the winter storms or Lena and Yuri interrupted both production and distribution.

You can see this and the dropped and total distribution points P. D. PS monthly net sales versus a year ago and February and our two year stack Nielsen consumption growth rate.

Prior to those February storms are improving production resulted in strong January shipments and healthy consumption growth.

Since the end of the second storm and mid February and you've seen similarly, strong bounce back and shipments consumption retail availability and our production levels.

Those trends continued into April with a strong upward trend and the weekly Nielsen consumption through the most recently reported week, we're now running at the consumption growth rate and we need to deliver our guidance for the year.

Second we successfully refilled a portion of the trade inventory and Q1 and expect shipments to exceed consumption and each quarter. This year.

We believe that we refilled about $3 million of trade inventory and Q1 and that contributed about four points to our growth rate, we would've filled considerably more but we lost $3 $5 million of production to winter storms. So virtually all of the trade inventory refill happened in March and it is accelerating.

Estimating treat inventory levels is always very difficult and and precise we.

Believe that leaves another $12 million of trade inventory to fill and Q2 and we have seen a significant portion of that happened in April as we've had very strong production performance.

As we indicated and the presentation. Our net sales in April are anticipated to be up about 42% while consumption and April is expected to be up by a similarly strong growth rate. Please remember that we were also refilling trade inventory and the year ago last year, we reported our total Q2 net sales growth rate included 11 points of trade.

Tori adjustments, we expect at this year's Q2 trade inventory refill may contribute to our growth rate at the level equal to or slightly above last year's adjustment.

Looking to the second half of 2020, one I'd remind you that in late Q3, and all of Q4 of 2020, we could not keep up with demand. So the shipments did not grow as fast as consumption and we drew down trade inventory.

We believe we will have the adequate capacity this year to meet the increasing demand and our shipment growth rate should exceed the consumption growth rate for the second half of the year.

Third point, despite our out of stocks and the first quarter of this year. We continued to successfully build both household penetration and buying right and the quarter.

As you know maximizing our first mover advantage and the fresh pet food space is of critical strategic priority for us. So our bias is always to lean in to maximize the number of households will become part of the fresh pet franchise.

And early November we delayed the start of our advertising and Q1 2021 the mid February and an effort to better match, our projected timing for improved retail conditions and the healthy media schedule fought to follow for the balance of the quarter at.

If we'd known and early November about the production challenges, we would face and late November and December due to COVID-19 not to mention a series of major winter storms that would curtail our production and accelerate out of stocks, we would've made of different choice Needless to say that was not ideal.

Right that we were still able to bring in new households at a very strong rate.

So all of the advertising and we're motivated by at driving household penetration of 25% and exceeding 4 million households for the first time the efficiency of the spend was likely reduced from our 2020 levels, but our early read suggests that it was in line with our 2019 levels of efficiency, which was still quite positive.

We also built the buying rate by 3% despite consumers inability to find her items for a good portion of the last six months.

Once it became apparent that the retail conditions would not be restored until the end of April we delayed the start of Q2 advertising until April 19th.

Well that will delay our ramp up and household penetration gains in Q2, we believe we got the timing right as retail conditions had improved dramatically at the time the advertising went on the air.

And I'll be on the air almost continuously for the balance of the year and that will provide significant momentum, particularly in the back half of the year.

The third topic I would like to cover is how our retail partners are thinking about fresh pet today in light of our recent out of stocks and the implications for fridge placements later this year and next year.

If there's anything at this experience has taught of retail partners and us at is that fresh pet has become a very important destination for pet parents, when the stores out of stock and fresh pad consumers are willing to go to a second or third store to find the product and they will call us asking where they can find at fresh pet really is that important to our pet parents.

And their pets and our retail partners have noticed.

Fresh pad is now larger and all dry dog food brands and the grocery channel, which is where some of our biggest distribution opportunities lie and our total dollar sales growth is now larger than the growth of every other wet and dry dog food brand and the Nielsen Mega channel, while the out of stocks didn't always make for the most comfortable conversations with our customers one clear.

Team of emerge from them. They now realized at winning with fresh pad is very important to their overall success and pet food and many of our leading customers are now planning to lean in on fresh and in fact eight of our top 10 customers now have significant tests were expansions of dual fridge placements and many of the planning more.

But before we place new fridges, and we need to be able to supply them. It makes no sense to put lots of new fridges and stores, if we can't supply the fridges that we already have.

As a result of the out of stocks of incurred in Q1 and cooperation with our customers. We delayed many of the new store fridge placements until later this year early next year and our capacity could support them. Thus our net new stores were only up 170, 422890 and Q1.

However, we had a strong quarter and upgrades, placing 293 of them and a decent quarter on second fridges, placing of 121 of them.

At this pace is consistent with the guidance we provided in February and we are on track to deliver our full year of 2021 goals.

We expect to see a steady stream of new placements throughout this year and the most significant placements occurring in Q4 and the first half of 2022.

<unk> expect to have the capacity to support of $590 million revenue run rate business by at the end of this year and about $1 billion run revenue run rate by the end of 2022 that will give us plenty of capacity and support the aggressive expansion of our customers are contemplating and we have shared that information with them. So we remain coordinated.

Before I turn it over the Heather I want to personally thank all of the investors who supported our recent equity offering at.

At offering is allowing us to accelerate our pace of capacity expansion, enabling us to build the capacity to support a $2 billion revenue business and helping us achieve our goal of changing the way people nurse their pets forever, but we have lots of work to do we are well on our way to deliver those projects now I will turn it over to Heather to provide the details on our financial results.

<unk>.

Thank you Barry and good afternoon, everyone.

The only indicated net sales for Q1 of 2021 or of $93 four of them now.

33% versus a year ago.

Actual Nielsen Mega channel consumption was up 24 per cent.

After adjusting for one less day and the quarter this year.

And you didn't present and the reduction of oil and the trade inventory reduction and the year, though we estimate that four points of our growth came from our efforts to rebuild trade inventory and meet all of the French at that at.

Is about 3 million of our net sales in the quarter.

And we believe we have another 12 million of trade inventory that we were the resale and Q2 and we are on track to do that.

We believe we could have sold more in the quarter, if we kind of forget the floor.

About $3 $5 million of production.

Two major snow storms that occurred in the quarter.

Well the winter snow storms and not surprise anyone the east.

The arms had a disproportionate impact on us.

Of the magnitude of the stores, where we have production facility.

And <unk> that we had no excess capacity and.

Neither we nor our customers had any inventory buffer at the end.

The growth in the quarter continued to be led by strong performance.

Pet specialty channel with Nielsen measure and big box pet specialty consumption up 43% and the quota.

Our E Commerce business also performed well.

And 56 per.

And the quarter and now accounts for $6 three per cent of sale.

Additionally, we had very strong performance and our international market.

Our international business grew 36% and the Florida and the continued strong momentum in those market behind the advertising investments, we have and Nathan and clearly the fresh that business model work outside the U S.

Adjusted EBITDA for Q1 was 7.8 and roll them up 35% rest of the year ago slightly outpacing payoffs at the <unk>.

The ability what have been greater except we incurred significant cost increases and the corner.

This was due to the freight inflation, we saw coming and communicated on our February call.

And a larger portion of the increase was due to our low order fill rate.

It was the system limitations, we have and our current ERP system, we don't have the ability to consolidate low and very easily when we are shipping less than 100% of the customers order.

And when customers gave us very large orders to meet both weekly demand and also refill their inventory and.

And we only had limited inventory to satisfy the at water.

Fill rates dropped quite significantly.

And that would ship truck that we're half empty driving at.

Freight cost per pound I have provided a chart in the presentation that describes how this happened and the impact that it has.

This problem will be remedied as the rebuild of our inventory both ours and our customers.

And the customer orders better reflect actual weekly consumption.

And that that will happen gradually throughout Q2, however, the fill rates will only improve modestly until the rebuild our internal inventories on the vast majority of that cares and.

In other words, we anticipate refilling trade inventory before we are able to completely solved and the fill rate and efficiency.

And that will likely occur sometime into the fray.

Our new ERP system will also have the capability to allocate inventory per order before shipment, allowing for order consolidation, which will be of the net value should we ever faced the problem again that and your system is targeted to go live at the beginning of Q4.

Until the remedies are plug and play we believe we can offset the higher call elsewhere in the P&L and still deliver of our adjusted EBITDA guidance for the year, but they will reduce our opportunity for SG&A leverage volume until that is completed.

Adjusted gross margin improved modestly from Q4 up 90 basis points to 46, 7% that was well below the year end of $49 five per cent.

We continue to incur at the higher beef cost and higher wages, which were anticipated, but we also incurred higher unabsorbed fixed costs due to the loss of production caused by the storms in February and this.

Currently expanded production at kitchen, south drove higher processing costs.

We believe that the investments and the higher night shift wages and the expanded production at kitchen South.

Paying significant dividends in terms of strong and steady production that is enabling us to refill and the trade inventory.

Because there is lots of discussion about cost inflation and the market today I want to comment on how we are seeing that today and outlined what you can expect from us.

As many of you know chicken is our single largest ingredient expenditure and the lock that price for the year and December at prices that are flat versus the year ago.

I have already mentioned that we are experiencing inflation in beef and freight both of what's the plan for this year.

With those increases being in line with our expectations at this point.

We are beginning to see some inflation and resin based materials such as packaging. The total impact appears to be modest and manageable within the context of our guidance.

We are also beginning to see evidence of labor cost inflation, but we are not expecting a significant increase the share. We will continue to watch these costs as the year progress at the for making any determination about whether we need to take any action.

If we did it would not have any impact until 2020 two.

Media investment and the quarter was in line with our long term rate at slightly above 12% of net sales at below the 16, 7%. We had in the year end, though recall, we delayed the start of advertising and Q1.

At some time to rebuild the trade inventory first.

Excluding the higher freight and lower media costs and the quarter SG&A was down 160 basis points versus a year ago, giving us the confidence that our long term road map towards 1000 basis points of SG&A leveraged by 2025, excluding media spend is on track.

We incurred $950000 and COVID-19 related expenses and the quarter and have added those back.

And that's to complete our COVID-19 add backs and Q3 as we anticipate the enough of our teams have been vaccinated by that the roll back some of the incremental provision we have put in place.

Our net cash used in operations was $5 $5 million and Q1.

Our cash used in operations was driven by accounts receivable and inventory working capital needs through the strong net sales growth and production and the last month of the quarter.

And we successfully completed our equity offering in the quarter, netting $332 5 million our cash on hand at the end of the quarter was $341 million.

We spent $49 3 million and capex and the quarter.

And this facility and entering some of its highest investment quarter as all of the site preparation of concrete foundations have been poured and steel has been going on for about a month now.

Additionally, our project of out of second line and kept the south is on track and produce products by the end of Q3 and the third line and there will come online at the beginning of 2020 two.

We are also taking advantage of the incremental capacity, that's coming online to make some upgrades and our existing kitchens one day.

And expect to have that work completed by the end of the year.

That work will improve quality and reduce some of our labor costs and one of the existing line.

I also want to comment on the productivity, we are seeing from the new line and kitchen changed at all.

You will recall, we raised our throughput expectation for those lines, let me provide at our updated long term capital plan and late February.

And the plan, we acknowledged at the higher speed line and greater automation that we placed and kitchen to data and deliver higher output and we included in our original projection.

We are continuing to see that level of productivity as we increase the hours of production on the line and we are also seeing outstanding quality.

We are not done and expanding the shifts and that facility yet.

The significant incremental production capacity, yet to come but it's very exciting for us to realize the benefits of the manufacturing expertise we have been investing at.

We believe we have created the new standard for fresh cut production and look forward to sharing it with you when the world opens up and we can host visitors again.

Turning to our guidance for 2020. One we are reiterating our guidance for the year that calls for net sales of greater than $430 million and adjusted EBITDA of greater than $61 million and the presentation. You will see some of the many assumptions that go into that guidance and also some detail on the cadence.

We are expecting.

As we have said the unusual nature of last year's consumption patterns, and our short shut and it will make the year on year comparison, a bit on the we are doing our best to clarify as many of the moving parts as we can.

In particular as we looked at Q2, please take into account the following.

In the quarter, we expect to complete the resell of the trade inventory at home, we created and the back half of 2020. However, we did something similar and a year ago. So we will not necessarily experience at significantly higher shipment growth rate than the consumption growth rate reported by Nielsen, but based on what we.

We're seeing so far the consumption growth rate has been robust and we are projecting continued strong shipment.

We expect to see sequential improvement and adjusted gross margin and we continue to produce and at very high level and at.

At the exit 'twenty, 'twenty, one where the fourth quarter gross margin run rate higher than our full year of 2020 results.

We are still on track for the average adjusted gross margin to be flat to 2020.

We will continue to experience higher freight cost due to our depleted inventory levels for most of Q2 and potentially part of Q3.

And this will diminish our leverage gains and adjusted SG&A, Excluding media this year, but we expect those increased costs to be gone by Q4.

We will have a very strong advertising investment and Q2 as we ramp up our growth to catch up to the increased production capacity, we have created the.

That investment will continue through the end of 2021 with comparable spending and absolute dollars planned and each of the three remaining quarters.

In closing our guidance for 2021 continues to call for net sales greater than 430 million up 35 per cent rest of the year ago, and adjusted EBITDA greater than 61 million up 30% versus year ago.

We believe our strong performance in Q1.

Early and manufacturing has positioned us well for the balance of the year.

We are producing about 50% more than we did in the year ago, and we have more capacity coming online.

Our advertising is driving household penetration game and we have a strong continuous media pregnant and for the balance of the year.

The retailers recognize the value that fresh that brings to the category and are planning more and larger French placement.

And our innovation pipeline and deep.

And not have the luxury of all of those conditions being in place.

All of at the same time and a long time and we look.

Forward to taking advantage of the momentum that provides.

Accelerating our growth towards our 2025 goal of 11 million households.

At 1.25 billion and net sales and the 25% adjusted EBITDA margin.

That concludes our overview, we will now be glad to take your questions operator.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask the question. Please press star one on your telephone keypad at confirmation tone will indicate your line is and the question queue. You May Press Star two if you would like to remove your question from the queue sort of participants using <unk>.

Equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Your first question comes from the line of Ken Goldman with J P. Morgan. Please proceed with your question.

Hi, good afternoon, and thank you.

I know, there's some year on year I guess, the lumpiness to or there is some lumpiness of the year on year numbers, but the way I see at you've guided to annual run rate capacity and <unk> of $390 million and <unk>.

Potential sales, you've guided to $490 million and <unk> for the run rate. So I guess, if you just average those out and it kind of gets you to a quarterly run rate of about 110 million and dollar sales capacity of this quarter.

And we're doing the math on the call and on the fly, but it just feels like you're sort of saying to us.

No you should probably get close to that 110 million number and dollar sales unless you under ship consumption, which seems unlikely. So I just wanted to make sure my math, there is not totally inaccurate and how to think about.

Implied guidance for <unk> revenue.

Oh.

Yeah.

Hello.

Hi, Ken.

And sorry, I am sorry, Okay, and I was sorry, I was talking on mute I apologize.

No I thought so.

And for the first time in history.

Yeah, I know, sorry, and Scott Thanks for try and jump in so Ken your math is right.

But I caution that there is theres a couple of the assumptions that are built in there. The first assumption is that we have at the end of the quarter that we that the demand is fully utilizing all the capacity we're filling the the trade inventory of whole now so it assumes that at the end of the quarter. The Nielsen consumption is using all of it up the second.

The second assumption there is as we continue to ramp up production Youre. The assumption is that what we produce and what is and demand is at dead match.

And so as you can imagine and we're going to start doing longer production runs and tried to refill some of our inventory to improve our customer service because we know as we have.

More inventory and house, our ability to do fill trucks goes up so we may end of the quarter with higher inventory as opposed to necessarily selling everything that we make it's not the ideal way to do it but it's ultimately what could end up happening, but other than that your math is right.

Okay. So just to clarify the.

And I'm not I don't want opinion of out of an exact number here because I know things are so fluid right now, but the 110 million seems like the maximum and you can produce but there are some caveats to that that could bring at potentially slightly below that.

And I'm not holding back and I'm just trying to get the same yeah. Yeah. It just recognize that there's the human component, yes, I mean, let's put it this way of Couldnt get in that direction, yes, there's the human component, we're adding staffing we have to produce well every time every week you you you get the idea, but we're in that ballpark.

Understood. That's helpful. Thank you for that and then.

And you spoke last quarter about a major expansion and E. Commerce, obviously E. Com is doing great for you still I think the sheer though another mentioned of that major expansion today unless I missed it I. Just wanted to know are you still on schedule with those partners or maybe of your production challenges temporarily delayed some of the bump up you might have expected just hoping for and up.

Because that was such a and important part of the story of last quarter.

Now you wanted to and Scott Yeah, Hey, it's got to know everything is everything is running on schedule and I wish everything was running and as tight as this is true.

And I think what you're going to see from us over the course of this year you'll.

You'll see a lot of expansion and ecommerce in general we've actually had to shut down a lot of the marketing and advertising that we've done over the past year, just because of some of the capacity issue. So you'll see expansion with many of the folks that we currently work with where the majority of it goes through our existing fridge network and you'll also see some additional ecommerce partners.

Come and coming where you wouldn't be able to order of different thing from from some new partners, we're going to increase the marketing we anticipate it will continue to increase our share overall share of the business.

And we're getting a ton of inbound requests from consumers from a subscription standpoint, we think we'll be able to we will be able to solve that this year. So we're very excited about that and where we're really planning on working with the right partners under the you know we're really really good kind of joined the set of terms that we can we can really kind of make a.

Major impact and e-commerce.

And of course of this year.

Thank you.

Thanks, Ken.

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

Thank you good afternoon, everyone and I have a question for you Heather it's just on the.

Overall cost structure, so you talked about chicken being locked in beef being a little inflation and some packaging inflation.

And then freight separately and the selling expense could you just help size up each of those to your overall cost pools with and just understand a little bit about <unk>.

The impact in each of those big buckets.

Sure.

Sure and stuff, so just the sort of dimensionalize.

How to think about our input costs.

And where are they show up the first cost of goods when you split up the.

And the input cost of about 40% of our cost of goods and then just as a reminder of freight costs are in SG&A.

Well, you know when you're thinking about margin impact.

And that's the split there so yeah, I mean, we touched on it but I'll go into a little bit more detail, we anticipated inflation and beef, which is on track in terms of what you know at inline with what we got and guidance. We also anticipated packaging inflation, mainly and corrugate and and that's.

And also you know reflected in our plan and the only new one that's really emerging is around resins, and and right now and the resin impact and it appears to be pretty modest in terms of how that will impact our packaging costs overall.

So not a major driver and something that we're comfortable that we can absorb it within the overall P&L structure and overall guidance.

And then in freight.

Yeah, we touched on it but all of US go into a little bit more detail, we anticipate and freight inflation both in carrier of inflation as well as fuel surcharge and those are assumptions haven't changed versus what we had and guided the bigger driver is the issue that I talked about around the cost implication of a low fill rate and.

And that's a pretty meaningful on cost and if you look in the presentation, you'll see that that's you know when you look at a 50% fill rate versus the 90 per cent sorry about seven cents per pound. So it's pretty meaningful are the.

The impact in Q1 and.

And on a margin perspective, it's about 200 basis points. So we had 300 basis points and you know versus versus plan and logistics, but of which 200 and driven by that the rate issue.

Sorry versus the prior year and so you know that's pretty meaningful, but we do expect that as fill rate and prove it will naturally come down as we touched on.

Yeah.

Okay, that's great and if I could just one follow up and this also relates a little bit the ecommerce being about 6% of your business, but as youre thinking about deploying more dollars and advertising can you share with us a little bit about digital versus traditional next and then and you see E. Commerce continue to climb higher do distort more and more towards digital activation and <unk>.

Ocean.

Yeah, you know, it's a it's a really interesting question and something we tested our way through over the past kind of even five years on on how we go to market and we were a.

We make sure that the dollars that we're spending we keep incredibly close track on and do an incredible amount of analysis to make sure that they're as productive as possible. The vast majority of our spending continues to be on television.

We are finding that theres some great places in the connected TV and OTT and that we can spend dollars and they're really predict productive are we.

We have nice spending and digital but it's definitely not the it's the minority of our overall spend as we do a little bit more in e-commerce and what we've done over the past year, we get a really really good return on AD spend and when we're advertising specifically and the dollars go to a partner that has a way for a customer consumer to order at directly.

So you took against the card as an example, so as we're doing advertising and some of the different areas. We're getting really really good return on AD spend and we're going to continue to kind of press into that area until we see any type of diminishing returns. So I don't think it'll it'll cause the dramatic shift and and what you're we're seeing overall because it's all of it.

Very very small piece of the total the total pie for us, but over time, we definitely anticipate potentially moving some dollars into that area.

Thank you very helpful.

Your next question comes from the line of route patch Perique with Oppenheimer and company. Please proceed with your question.

Good afternoon, and thanks for taking my question. So as you look at you know the April data clearly consumer of of mobility has increased and I was just curious if you guys are seeing any changes in consumer behavior or where they're purchasing frostbite as if these have you seen some changes with the increase vaccinations et cetera.

The data were first of all in the deck. We show you know our estimate of what April's consumption has hurt our sales were and then also you've seen and the Nielsen data for the month and so you can see we're seeing an upward trend of along at a in terms of both consumption and as well as the shipments that were doing the the thing that's tougher.

To tell is is we have two things going on at the same time advertising went on the air for US on April 19th and our in store presentation has improved.

<unk> throughout the month of April and so with those two factors, we expect to see continued strong upward trends and consumption. So it's hard to separate that out from anything else like you know vaccinations and people, having more and mobility. The attitudinal data we've seen the the consumer comments were getting all suggest that the behavior is very similar.

I have to believe the site the graphically and consumers are feeling a little bit more liberated.

Okay. Okay, Great and then maybe just one follow up question. So clearly you guys have your you have some cost pressures and your business. It seems like this year, you'll be able to manage through and how do you think about the pricing lever going forward is that something may be at or is it later this year for next year or just curious on pricing. How are you guys thinking about that going forward.

Yeah refresh and Heather had made some comments and the AR and the in the prepared remarks that basically said, we will take a look at that but probably later later on this year, we'll look at it and see what the cost picture looks like frankly, we have to restore our or our customer service and get ourselves and a good position with both of our retailers and our consumers before we even think of.

About that and then we'll take a look at it and see what the with the position you know what the cost and.

And is that we have.

Hey repurchase Okay, and again, that's all Inc.

Ted.

Let me add on and kind of that being said, we have done pricing and the past and we've been able to manage it very well all of the businesses of responded incredibly well to it. So we do know at as a lever but at until he said, it's not something that we're we want to apply and the near term.

Okay, great. Thank you.

Your next question comes from the line of Bill Chapell with Truest. Please proceed with your question.

Thanks, and good afternoon.

Hello there.

And just to get the first question trying to understand kind of the.

Out of stocks and and and how we see at of at retail and it.

Doing a fair amount of sort of check and you can find some pretty bare fridges and you can even even as recently as the past couple of weeks and at historically its always its way of where you could find a fully stocked fridge just the just because it was either growing so fast where just because of the kind of customer service.

Or getting it to the to the fridge levels.

Should that change over this year I know you said you're going to have.

The reduction of up to make your sales goals, but I didn't know if the out of stocks would still be an issue throughout the year, where you may be leaving some sales on the table.

Yeah, Let me take a shot at it and Scott might have some comments to add on it but the out of stocks were at the very worst shortly after the snow storms that we had in February and whether you measure using TD piece, which is sort of a poor mans, but publicly available way of identifying what are out of stocks are or we do some of our own internal.

And at the bottom line is we've seen consistent improvement week on week since that depths and February and to the point that as of the most recent week you know there are still some fridges out there and it's it's in certain places and certain customers and uncertain Skus and youll see some spotty conditions, but we fully expect to see.

The much better looking fridges are in the next several weeks and if you take a look at the T. D. PS as a sort of a benchmark of at last August mid August when we were just at the first time, we are sort of ran out of capacity that was our high watermark and we had a lot of very full fridges back then and I'd expect us to be back at that level within the call at the next.

Six weeks or so and at that point, yes, you'll find some fridges that don't have all of the Skus. All the time, but you will find largely are well stocked fridges and Scott do you have anything to add to that.

Yeah.

And bill we've touched a little bit on at in the past and and and.

And sometimes we look at at and where I think everyone in the organization and sometimes the scratching their head on how we're putting up the number and we're putting up with some of the in stock conditions that we have which I think is of good signal we are into the conditions at some of you know retailers that are as low as 30% 40 per cent all the way up to 80%, but no one's even into the you know.

We may have a couple of people that are recently getting into the mid eighties, but where we're we have a good of a lot of opportunity a ton of opportunity and I think as we continue to get the rest of the port book people want to buy certain things if we get the rest of the portfolio filled out I think they're really nice upside for us and over the.

Over the course of the year.

Got it and.

You you talk about kind of pushing out some of the the new store openings, one at a little bit and and I might have asked this before about.

Innovation and you know even kind of SKU count expansion.

Have you done and near term adjustments with everything that went on and the quarter of where you need to push that out even further just to increase throughput of the most popular skus.

And what we've had.

Do you Wanna go ahead.

No no I was gonna say go ahead.

Oh.

Yeah, but also we were a lot of our innovation. This year was actually centered on lines that were not our high capacity like we have a handful of smaller lower capacity lines that enable us to get some of that newer innovation out we've been able to utilize those so it didn't take away from the the a lot of the.

Assay that we needed to put towards our base of items. So we were fortunate with that we did get some of that innovation out and there was a little bit of at that did the kind of slide slip and some of it will even go into next year at some retailers, but the majority of the innovation will go out as scheduled and and as planned throughout.

Throughout the year.

Okay, Great and then the sneak one one last you updated kind of sense of how much the the U S pet ownership of and spiked over the past 12 months.

[laughter], we've seen so many numbers on that just like you have there as well.

And I will tell you I've seen numbers that were as low as 2% and I've seen numbers and the high mid single digits are the best number I've seen would suggest that the pet ownership and I'm now speaking, mostly about dogs was up like 3%, maybe a little bit more than 3% and there was a big pull forward last year, but I.

And I don't believe the numbers that said it was a whole lot more of that I mean, if you got me the for I'd be.

Surprised.

Okay and the one thing at the other the other thing on the pet ownership piece I saw a study that was done recently that was really encouraging that not only was there you know some some increase and pets. There's only so many pets. The go round, but there is still pent up demand and at its still it seems.

It's continuing I think.

And hopefully people, realizing it's pretty awesome to have a dog or a cat or of pet and your family and so I don't think it's going away and it and it may continue to you know continue to grow over the next year or so.

No that's great. Thanks for the color.

Thanks Mark.

And it's a bill sorry Bill.

Your next question comes from the line of Peter Benedict with Baird. Please proceed with your question.

Hi, guys.

Of course.

And on on kind of production and one of the slides you had and here you had about 519000 pounds of day as the average in April and.

I think during the presentation all of the call here you spoke to some improvements.

The improvements coming from from some of the kitchen 2.0 lines at some increase coming at kitchen, South just trying to get a sense for.

Where you think.

Powell and production per day could be.

As we look out over I don't know maybe towards the second half of year or at the end of the year of benchmark of however, you want to frame it.

Yeah, I don't think of I haven't mapped it out in terms of pounds. One of my one of our manufacturing guys might've done that and its also very we have to be careful because when we use pounds, because we bring and a lot of of ingredients and that's the way we measure of the throughput, but it turns into cases and it turns into meals ultimately that we see.

At the feet of Pat what I can tell you is the chart that we've and also included in the deck that shows sort of as you converted into revenue and it shows what the revenue would be and each of the quarters is probably the best indicator of what we think we're going to get because one of the things that's going to happen as we expand the capacity of one of the lines that we're expanding the capacity on the most and where we're sure.

And just right now is on our fresh from the kitchen line and fresh from the kitchen is the highest price per pound of our you know of our mainstream items at.

And so when we start producing at the pound's won't be as big as some of the other items, but the dollars will go with it and so I just caution that using pounds is the only metric to think about our capacity could become a little bit of mis.

Misleading as we get further end of the year, but suffice it to say as we're going from where we are today, where we of all of our equipment running were now adding shifts as we add shifts we pick up capacity first of all of our bag line that are on a roll lines and then ultimately start up of another line of kitchen, South which will be another bag line. So we'll see more of the mix moving near term end of.

Rolls and longer term into bags and that will impact both the pounds and the dollars.

Okay. That's helpful. Thanks, Billy.

I guess, the and the P&L.

The.

The loss on equity investment line and they're not.

Sure. If you guys are willing to speak a little bit more about that and provide some color into that but isn't the channel I figured I'd ask.

Scott you want to talk about that.

I can.

And grab that yeah.

Yes.

And Heather.

Sorry, we went we went on mute sorry about that.

At that last there is representative of our percentage ownership.

And the investments that we've made and reflective of that businesses at Q4 performance and that's basically all of the week of chair.

Okay.

Right, that's right and then.

I guess last question for Scott with your social media and video today, its approaching 2000 and views across Instagram and Facebook how is that trending relative to your your expectations.

Yeah, well, yeah, we launched it at around 11 o'clock and I was quickly told that I have no chance for any type of award from the from the video so I'm I'm, a little concerned, but I'm going to work harder next time.

I mean, the Peter I think it's a it's been pretty well received if you kind of go through the comments I think very very well received honestly.

And you'll actually see some people and they're like Sydney and subscription kind of thing or a weighted for you I think it's been really supportive of and I think it's been support of all the way through and it's been it's been great to see over the next kind of two weeks are at this will this will have a long tail on it and and we will be putting a little bit of.

Spend behind at the communicated out because it's it's not.

None of the Vanity, it's about like really trying to be transparent and communicating with our consumers and making sure that the people people see it. So I think we'll see some of the numbers grow and the people that you know want to want to hear about it will we'll get a chance to kind of you know and see what we're talking about.

But so far so good.

I think of it.

If the if Andrew Cuomo got a and Ami for his COVID-19 Press conference at Sky should get and Oscar for that.

Alright, and I would think of them.

Not acting on and there's no act and go on.

Just the real deal.

Oh listen well done on that and I. Thank all of you.

<unk> been doing all of the letters and now the video it's great because obviously, a tough situation and for some consumers, but I think it goes over the well so anyway, just wanted to flag that for Ya alright, thanks, guys and thanks.

Your next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey folks.

Hello, There no clue, what the last exchange was it looks like I've Gotta go to check out my my space accounts and figure out what's happening so it should be at least.

But I will say we are one household that is thrilled to have a yield of five fresh that once again on a regular basis sort of having to go to six different stores. So I'm very happy to see the out of stock situations of better place at.

And so my questions couple of quick ones.

Logistics, we talk a lot about at today.

Remind me.

What is it like how big is at as a percentage of sales and can you give us the order of magnitude in terms of the impact this quarter of of what it changed from the two.

And they're going to take that.

Yeah, So last year, the prior year kind of full year at around eight 5% and and you know all else being equal we expect that to continue to go down the scale, having said that we anticipated freight inflation and fuel surcharge of inflation of about 100 basis points.

In Q1 actually the performance of 300 basis points worse than prior year. So it's about 200 basis point impact for Q1 from the fill rate issues and and if you look at the have the chance to look at the chart and the presentation you can see how it moves the fill rate, but on the cost per pound right now.

Looking at about a seven cents per pound on costs due to the issue.

Well.

The big numbers. Thank you.

And I appreciate the the store additions have been derail will buy two things you cited your service levels and I'm sure of COVID-19. There's also been a disruptor too in terms of resets and new store builds et cetera.

But.

If we think about the out of stocks, which arguably more implant and I think you thought you'd be up and running or back to better service of those quicker than you were have you missed any key windows. So is this just the deferral of when we get the stores or is it possible that we you just missed until next year. So we just have to move store count out of out of this year and into next year.

Let me, let me, let Scott will talk about the customer and dynamic I will tell you recall when we gave our guidance at the end of February. So we had fairly good visibility about what the customers would be doing so the guidance. We gave for the year accounted for any of those kinds of shifts that might have occurred but Scott can pay a little bit more about how customers are thinking about what will come this year versus next year.

Yeah. So there are a couple of the windows that we did miss because they were you know they were just.

We just kind of get our what we needed to from a from a production standpoint, and together and they are.

Yeah, they're meaningful but it was really mentioned the reflected in the numbers already from the store count standpoint, and also from an annual revenue standpoint. So we're I think we're in good shape from that and we're already as people are starting to see some fill rates come back we're sharing with them being incredibly transparent and all the information we're sharing with them.

And what lines of opening when and how we're opening them up the adding the shifts I think that they've had a lot of confidence in and what we've been communicating and we're actually back and conversations with a bunch of them on additional opportunities, which some of them will develop potentially later this year, but I think most of it will be the will really be early next year and you know kind of the the front half of net.

Year, I would think that we would.

Outpace what we've historically done would be my guess.

Jason and I think it's also important to know the moat. Many of our customers right. Now are looking at you know year on year trends that are not very favorable on the rest of the of the pet food market and we're growing at a very strong rate and you'll see there's a chart in the deck that shows you know of literally how big we are now and grocery compared to the other brands and how much of our growth rate.

As for the total category and so I think if you're a customer and you're trying to figure out where you want to put your investment of space.

We are increasingly an important part of that conversation.

Okay. You invited me to ask you a follow up and on that one and so it's the same more you just said the cash.

Gory at I mean, here's what I heard the category Alex of the category is not that great for the rest of the year and it's what is what I hear at just heard you say, you're an exception, but my question is why would that be I mean back to the point earlier, we've got 3% more pets and they're getting the larger theyre going to eat more I get it on pet snacks, where maybe people aren't at his home was watching me and my kids are feed and my dog treats left and right you can't work.

To get back to school and save of my treat budget.

So I imagine Patrick sales go down what is the reason to be cautious on the overall category.

And the reason is that at the I'm speaking from the perspective of the retailer who saw a fair amount of their business moved to ecommerce and it didn't come back.

Got it. So if you are thinking about how you allocate your space at retail or fresh pet fridge is a really good way to invest your space.

Yeah, and it makes sense. Thank you.

Your next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

Yes, Thanks and afternoon everyone.

And I wanted to start.

Hey, there I wanted to start with a follow up to the last question. So you you made a pretty I guess forceful statement about stay tuned on E Commerce and partners. There is there any way to think about the incrementals. The from an e-commerce customer and maybe even a pure play ecommerce customer relative to what you would do.

Essentially in a store and how you're thinking about that in terms of flow through and the model.

Yes, we have done a fair amount of work trying to establish exactly what the impact will be and our business and everything from what we can tell is and the very first of all it's gonna be very kind of slow even.

In the launch and it's Gonna look at take some time for people to realize the it's available in different places no matter, where that is so it's going to take some time to two of kind of have its full impact we think at the very beginning at will be.

And as much and there'll be penetration gain but a lot of it will be kind of moving consumer from potentially from one place to another and we want to limit the at as much as possible that's not our goal by any means.

Over time, we think the single greatest benefit is it will increase our buying rate dramatically and I'm talking like a little bit I'm talking like on like the multiples.

Because when you see someone that is on either of some type of subscription or some type of consistent basis, where they're getting the product on a certain cadence and the overall dollars of the spend is significantly higher. So we think it's going to open our buying rate up tremendously and it won't be something that we'll just have this year's impact it could be also.

And you know next year and even the year after impact.

We have specific dollar amounts that we've kind of put into our budget that roll into our overall guidance for this year for the for what we're doing and E. Commerce. So theres no there shouldn't be kind of any upside surprises. If we have done our modeling correctly and I think as we kind of get the you know some of these launches and behind us.

So I think that we'll be able to kind of share a little bit more detail at at this point I think I'm, telling you at probably as much as I feel like we can share.

Yes, that's helpful.

On the buying rate just not relating to the the last question, but just broadly it was up.

Year on year in one queue.

And I guess relative to the last year, and it's always sort of been thought of at least I need. The household penetration goes up buying rate comes down to you got people kind of coming in at the lower buying rate sampling rate. However, you want to think about it so what drove the.

The increase of <unk>.

Was there of people kind of pantry loading from the out of stock standpoint, how do you think about that that number over the balance of the year and you know how do you think about it as well in terms of the incremental that you're you're talking about in terms of the products, which have been out of stock of which also have a higher dollar value going forward.

Yeah, let.

Let me take that let me, let me take a shot at that and then Scott if you want to add to it but first of all at the remember the buying rate number that we quote and the deck is a 52 week number for the ending at the end of the quarter. So the up 3% reflects the past 52 weeks and.

And of our historical run rate has been and the call at you know mid single digits kind of run rate, we we'd like to see that number up and the six or seven per cent range. It was lower than I would've expected because of the out of stocks were basically consumers couldn't find the products that they were looking for is.

Is there any hoarding I would say if there was any hoarding or loading up on by consumers at every one of those who loaded up it was offsetting somebody who couldn't find any other product elsewhere. So I my sense is that as we get better in stock conditions Youre going to see the buying rate go up in addition to the buying rate improvement that Scott mentioned related to the E com.

Immerse.

Got it Okay. That's helpful Yeah and cool.

I think you know as bill was saying Mark there's a ton of like there's puts and takes on all of this so it's like what products that we have available what do we not have available was the hoarding where people some people couldn't find it so they couldn't buy as much over the quarter I think it's the it's honestly, it's a tough one to read I would go with one of the historical progress that we've made and it's probably a cleaner.

Look.

And until our kind of in stocks get settled out over the you know the next kind of six to eight weeks and it really gets settled out I think you'll see kind of at real consistent progression and how we've modeled overtime.

Okay got it and I don't know if I'm still on and wanted to ask maybe a follow up related to that have you seen any of your customers.

Kind of push consumers and different products.

As a result of these out of stocks and yet how are you addressing that and then at.

Any impact on the business.

Yeah, you know look I'm, there's a handful of customers they they've done what they needed to do them for the business. They have consumers coming into their stores. We don't have product shame on us right, where we're not we're not taking care of anybody that way and they have pushed some people and some different direction.

And I honestly going through the comments today, there's not a ton of comments I mean, we usually get we'll get you know a thousand plus comments on when we posted these notes most of the people are cheering for us and telling US I tried some other things and you can see it and some of the notes already I've tried other things and I'm coming back and my dog didn't like or my dog and eat or whatever.

It may be so I think once we get ourselves set once we get the the innovation out there over the course of this year I think we're gonna see people coming and coming back to the the you know the you know the the business and it's frustrating to have some of our customers you know pushing people in different directions, but I understand at and.

I hope they are most of them are they understand the situation and there are good partners and we'll work our way through at all.

Got it alright, well thanks Paul.

Thanks Mark.

Your next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.

Hey, good afternoon everybody.

Hello there.

Just a few of most of my questions have been asked and answered on E. Commerce. If you were to add a new partner of significant new partner, how should we think about the economics of the relationship.

Do you shoot to be agnostic relative to the overall business or are there some distinct considerations there that you might.

You know take the incremental households incremental buy rate over.

Over the long term and exchange for maybe a tighter margin.

Yeah. So it's interesting I I got a or at least one of my career I got an incredible lesson on as you develop a piece of business make sure. It does not margin dilutive. If you think it's going to get big over time.

And just like everything that we've done at fresh cut we've really tried to be thoughtful and just do things. The right way. We are and we are margin neutral with with really almost entirely across our business. Other than Europe. We are very margin neutral I mean, it's amazingly margin neutral and we've made sure that we were.

And develop partnerships that are really going to be margin neutral.

And you can't have a huge piece of business on the debt you know develops over time all of a sudden at 10 15 20 per cent of your business and now you've got a massive margin problem. So you you created one opportunity and dug yourself of giant hold its almost impossible of unwind. So we've worked really hard as we've developed all of our partnerships to make sure that the.

The the the.

The the relationship and the margins look you know look the appropriate for our business and at works from a value standpoint for.

And for the consumer at works for the the partner or a retailer or E Comm partners and it works for us and if at all.

If you if you can't figure out how to make it work for all three of you Gotta go back of the drawing board and we've done at a lot of times quite honestly.

Over the past kind of you know 10 years call it.

But but especially in and you know and the last moves that we make and the market you've got to make sure that you're you're putting yourself and a good spot typically the the.

One way of these margins go overtime and its down and see you got to make sure that you're you're are you putting yourself and a good position upfront.

That's helpful. Thank you shifting gears a media spend.

The 10% I think last year was the media ratio.

You started out this year with 12% and Q1.

Understand the puts and takes around that but it sounds like the spigot is on for the balance of the year.

What's the right way to think about the media ratio for the year and the cadence following Q1.

So we are the the ratio for the year, we're targeting 12.

And I, you know and in that ballpark is the way to think about it and we have and the deck. We gave you a pretty clear indication of the cadence that once we are back on the year, which was in April that the media will be on continuously for the basically for the balance of the year and the spending will be comparable and each of the quarters.

Perfect and and absolute dollar basis.

Okay.

Last one for me at pet specialty and you're you're killing it and pet pet specialty could you talk a little bit about the dynamics there or is this a format or channel phenomenon I mean, the category performing well and that channel is at a fresh pet.

The specific situation and and how long do you expect it to persist. Thanks.

Yeah.

A few things yeah. There's a few things that are going into the play on that one John one of them and as I think we put ourselves and a good situation from the like a foundation standpoint, meaning there were a lot of a lot of stores the big fridges and a lot of stores now with second fridges and Theres been really nice expansion and pet, especially over the past year or two.

And that's still paying dividends and because when we have a second fridge. It allows us to get more variety and innovation into the fringe and addition to having more inventory. So it solves a handful of a handful of challenges there I think the the other dynamic that we have seen a little bit with pet specialty as I think we are really really suffering and a few other formats and I think people.

And <unk> are making a trip, especially the more involved pet parents are making a little of a few extra trips to of petsmart or of petco or a pet supplies plus type of store of any type of pet store and they're finding our products there and I think that's adding to it too but I do think it's a combination of several factors. Good base. Good Foundation innovation and then and then also.

I think some some people finding at where they have not necessarily seen it before so and and I think this is going to continue for quite a while I mean, we also know that once people start and a spot, they're pretty darn sticky and the and the location where they they they originally found and the product.

Yeah that makes sense. Thanks, so much everybody and good luck going forward.

Thanks.

Your next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Hi, just a couple of quick ones.

At you Might've mentioned at the beginning of the call like what percent of your Cogs is labor, but I wanted to ask again, because you know you talk more than most of your peers about wage inflation and what it takes to get people to get to the come to the plants and you're also expanding your of a really.

A successful product. So I'm just kind of curious at it are you seeing wage inflation rise to a level that with is getting more alarming to you.

Or is it just kind of like mid single digit kind of kind of inflation that.

And it wouldn't necessarily on its own necessitate price changes and then I had a quick follow up.

Let me take that and Heather and might add some commentary on how much labor as part of our P&L, but the overall pieces, it's not at the alarming level.

There is a more of a localized issue that we're addressing here in the Lehigh Valley, where the fresh food kitchens are the Lehigh Valley has become a major distribution hub for north eastern part of the United States and so there's a fairly significant number of sizable employers who are fishing and the PON looking for a warehouse labor you know fed.

Ex Amazon Walmart and whatnot, a lot of big warehouses and so it means the lower end of the market is fairly overfished and so one of the things. We're trying to figure out is what does it take to get the skilled labor that we need and what are the wage rates to do that.

We're we're competitive today, we're attracting people are the.

Total package that we offer people Inc.

<unk> more than just wages. It also includes at what we think is a fairly generous benefits package, we feed people and whatnot. So it's a very it's a very good working environment and we want to win on the environment not on the wages.

But it is a more of a localized the fact is the way I would describe at however, you want to give any of the commentary on the labor is a part of our P&L.

Sure. So just to the more specific around the end application for this year, so wages or about 60 per cent of our Cogs and labor and overheads I should say at about 60 per cent of our cost of goods and within that and of course as wages. We yeah low single digits in terms of fraud and <unk>.

Nation, but just as a reminder, we've also increased our night chip premium.

By $2 an hour. So we have now at $3 premium on the night shift and that was and on cost that we've included in our plans for the year, but certainly and inflationary item that we've got the here.

Okay, so the inflation wage inflation and different and and its Texas, it's not not quite as acute.

Yeah, and you know, we're going to start doing our hiring and Ennis, Texas are the second half of this year lots of see what it ends up looking like it does feel like there's a lot of people moving to Texas at this point, but when we pick that as the site, we were very comfortable with the wages and that market and we frankly I think we can get very high caliber talent at the wages that we'd expect the.

Pay so we're optimistic about that.

Okay and then just last question you mentioned that you're you're of the top selling of pet food brand in grocery stores are at very impressive is at similar in mass also is that.

<unk> and those charts too or is it a little lower and mass now it's it's it's lower and mass so think of it this way as a way of the biggest brand and we're bigger than all of the the dry dog food brands in grocery and the reason I called that net that out was because that's where some of our significant distribution expansion opportunities are so if you're one of those retailers you'll be looking at that data and.

Say this is where I should invest them of my space the the.

The broader number what do you think about the whole Nielsen Mega channel, we're including and data, including it and that is mass is that we are the fastest growing and not just and percentage, but in absolute dollars and that's the second chart. That's included in that deck that shows how much our dollar of absolute dollar growth is relative to the rest of the brands and the category, we are growing and absolute.

Dollars faster than everybody else's.

Okay, Great alright, thanks, guys.

Yes.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Billy Cyr for closing remarks.

Thank you. Thank you everyone for your attention and I wanted to just leave you with one thought.

This is from the Aldo Huxley to his dog every managed of Polian, hence the constant popularity of dogs to which I would add if you feed them fresh pet and your dog size you deserve to be called Emperor at Napoleon. Thank you for your interest and fresh pet and we look forward to talking to you again at the end of the next quarter. Thank you.

This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.

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