Q4 2021 Freshpet Inc Earnings Call
Greetings and welcome to the fresh pet fourth quarter and fiscal year 2021 earnings call. At this time all participants are in a listen only mode. A brief 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 it is now my pleasure to introduce your host Jeff Sonic with ICR. Thank you, Jeff you may begin.
Thank you good afternoon, and welcome to fresh breads fourth quarter of 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 <unk>.
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.
<unk> 10-K filed with the SEC and the company's press release issued today for detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in 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 <unk>.
Justin EBITDA among others, while the company believes these non-GAAP financial measures provide useful information for investors.
<unk> of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for how management defines of such non-GAAP measures reconciliation of the non-GAAP financial matters to the most comparable measures prepared in accordance with GAAP.
And limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call that presentation can be found on the company's investor website managements commentary will not specifically walk through the presentation on the call, but rather it's a summary of the rig.
<unk> 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. The message I would like you to take away from today's call is that we finally have the capacity needed to support our significant growth potential and build upon the momentum that we've created through five consecutive years of accelerating revenue growth, we fully intend to take advantage of that capacity.
But we've also learned some hard yet valuable lessons over the past two years. Those lessons are the foundation for the Conservative planning that we've undertaken which we believe is required in this complex and challenging environment.
Over the past two years, we've navigated everything from the Covid crisis to labor shortages and supply chain issues and inflation our operations wobbled numerous times along the way we are keenly aware of the impact those have had on our many stakeholders, most notably our customers and consumers we learned that in order to.
Or a long term sustainable growth fresh pad is capable of we need to do a better job preparing for and insulating ourselves from those issues.
The environment, we're operating in today still has many of the issues we have faced over the past two years, albeit some are less impactful like COVID-19 and others are more impactful like inflation, but the more important change is how well we've prepared for those issues and plan for new and unknown challenges, we finally have more than enough capacity.
And if more coming online we have stabilized trained and developed our workforce and we have completed our ERP conversion.
Further we have strengthened our marketing programs increased our innovation installed more and larger fridges and built a broader and deeper management team.
We have a rare opportunity to change the way people feed their pets forever and build a truly great company to do that so we need to plan and prepare for continued disruption to ensure the reliability of our operations in an uncertain environment. While also planning to aggressively maximize fresh pet's growth potential we bill.
The plan, we are sharing with you today strikes the right balance between the two.
Perhaps the most important decision we are making to achieve that relates to how we will manage our capacity. We successfully built enough capacity to refill the trade inventory hole, we created during 2020 and early 2021 .
It took a long time to refill that hole and to do it we had to both delay our growth and increase our production to a level well in excess of demand for perspective in February we produced at an annualized run rate of approximately $600 million in net sales, while our consumption loan rate was approximately $490 million and net sale.
So we're.
Currently producing at an annualized run rate more than $100 million greater than demand.
That is the magnitude of the production increase we had to put in place to refill the trade inventory hole.
Note that both the production and net sales numbers I just provided are at the pricing in place in February prior to our second price increase.
We also have more capacity coming online throughout throughout 2022, both in N S and kitchen south.
It gives us plenty of headroom to grow and we plan to use it we expect to grow at a rapid rate and we will invest in marketing earlier in the year to drive our growth, but it will take time to fill that much capacity.
So for a period of time, we will have more capacity than a reasonable and conservative assumptions would indicate you'll need.
And excess capacity generally means excess cost.
We debated quite a bit about the best way to manage that we analyze the pros and cons of delaying or capacity additions and scaling back production staffing to deliver more robust margins this year.
In doing so we are mindful of several important risk factors first ERP conversion, we just completed our ERP conversion and while it is going well as anyone who has done one can tell you there are always bumps along the way.
Second construction and startup of N S.
Heavily dependent on the completion of the construction of our honest, Texas facility and a successful startup now delayed to early Q3 due to construction materials shortages as.
As we all know it is very difficult to get construction materials and equipment delays are numerous and lengthy.
Further startups always come with some level of risk there.
Tight labor markets, we are in the midst of one of the tightest labor markets in decades, we've worked hard to build a team of highly skilled employees and have real momentum with our training program. The fresh Pet Academy, we were seeing the dividends that labor strategy every day, but the labor market remains a risk.
Fourth supply chain disruptions up and down the supply chain, we're seeing interruptions brought on by everything from labor shortages to port blockages to material shortages, and even mandate and locked down protests and now avian flu.
Liability of supply and transportation something we used to take for granted can no longer be assumed.
And many of the shortages are unpredictable for example, who would've thought that a Canadian vaccine mandate protests by truckers would disrupt the carrot supply in the U S.
Fifth Covid, while we all hope that Covid is largely behind us and we can return to some level of normalcy, we would look foolish if our plan required that this virus and the magnitude of its impact on families and the supply chain has constantly surprised people and we don't want to be in that spot again.
And sixth pricing and inflation.
Finally, we've taken the most significant price increase we've ever taken and we are budgeting for a reasonable level of price sensitivity.
However, if we have less price sensitivity and we've modeled we do not want to get ourselves in a position, where we cannot supply our customers and consumers reliably Alternatively, we lock our cost on as many of our ingredients and materials as we can prior to the beginning of the year some of them continue to float the pricing actions we've taken.
Can fully address the inflation, we saw an anticipated at the time, we took the pricing well we continue to watch the costs and if we see higher cost persist for any reasonable length of time, we will not hesitate to take the necessary pricing to recover those costs as quickly as possible.
Given those factors we've made the decision to carry buffer manufacturing capacity. This year that is capacity. It is more than we theoretically need to meet the guidance we are providing.
We view this as a very important strategic decision and the result of our experience over the past two years.
We have a unique opportunity to create and define the pressure fresh pet food market and capture the lion's share of it as long as we can reliably supply our customers and consumers failing to do so opens the door for competitors and encourages our customers and consumers to look elsewhere squandering. Our first mover advantage that is the risk we are not.
Willing to take.
The cost of the Unabsorbed overhead created with this approach is significant in the short run costing us approximately $13 million to $17 million for the year or approximately 225 to 300 basis points of adjusted gross margin, but incredibly inexpensive over the long run if that investment enables us to capture it in may.
Paint a much larger share of the emerging market for fresh pet food for a long time that investment will look tiny in comparison to the opportunity it created.
This approach has already paid dividends for us in January we were able to shut down one production line for much of the month to absorb the higher absenteeism due to omicron and still keep up with demand rather than digging a deeper trade inventory hole and further frustrating our customers and consumers.
Despite all the challenges of omicron, our fill rates improve from the mid sixties in December to the high Eighty's last week and our year to date shipments were up 38% versus year ago.
This approach also allows us to meet demand if it exceeds our projections, which is possible. If we experience less price sensitivity than we planned for advertising proves to be more effective than anticipated.
Finally, it can enable us to opportunistically expand distribution or launch innovative new products, if any of those generate upside volume that would help us absorb the overhead investment we are making.
We are also convinced we will need that capacity by late Q4 of this year and believe it would be counterproductive to scale back the capacity only to have to ramp it back up in less than six months.
This is especially true with regard to labor as we've worked hard to recruit and train the talent needed to overcome the pandemic challenges. It is imperative that we strategically build upon our talent and labor pool not diminish it.
I suspect there are some of you who wish our capacity would be more elastic so do I.
But when you have the only production capacity capable of producing our best in class products, the only flexes within our network.
Unlike so many other fast growing companies, who can turn on and turn off co Packers you can't do that we are building the largest most efficient and most highly capable fresh pet food manufacturing base capable supporting new business of $2 billion or more.
We view that as a strategic advantage and we will need all the capacity. We are operating now by the end of this year and will need even more next year.
To help you understand the impact of this choice will be providing a margin and profit illustration at the end of each quarter and for the year that dimensionalize the costs as I said it is sizable but against the scale of the long term opportunity. We are seizing it is a small price to pay.
We will be able to continue and accelerate our momentum.
Store, our credibility with customers and consumers and insulate ourselves from the volatility that may be ahead of us.
With that context, let me outline some of the key points of our plan for 2022.
First we are guiding to greater than 575 million and net sales for the year.
If we deliver that we will have generated 35% growth for the year, our sixth consecutive year of accelerating growth.
That net sales target is inclusive of our blended pricing impact of approximately 15% I E. The fiscal year impact of the two price increases, we've announced and implemented and an assumption of some price elasticity due to the magnitude of the price increases while we believe our brand in pet food in general are relatively inelastic.
Our projections assume that net sales growth will be about 10 points greater in unit movement growth.
Our guidance also includes an understanding of the headwind we have due to the trade inventory refill and a year ago, partially offset by the more modest street inventory refill we are completing on bags in Q1.
A 35% growth rate might not sound like it is a conservative assumption. However, our year to date Nielsen's are up approximately 35% and accelerating with the most recent weeks up approximately 40% and that is before we get any benefit from the second price increase.
Further we will be lapping an extended period of out of stocks and delayed marketing in the year ago for most of the first half of 2022.
To deliver those net sales we will lean heavily on our advertising program. Our advertising investment is approximately 12% of net sales and more heavily front loaded consistent with the way we did our media planning in years prior to the pandemic.
Those investments put US ahead of our plans by mid year, we would add more media later in the year to keep the momentum going and utilize that buffer capacity we have.
We're also watching the impact at the higher pricing will have on our household penetration and buying rate.
We believe that we will have a short term setback on household penetration and the higher pricing first appears on the shelf.
It will quickly turned positive as we have for distribution, a heavier media plan and increased fridge placements.
The buying rate will likely benefit from the higher pricing, even if a small number of consumers choose to use less fresh pet and make our long term target more achievable.
However, there will be some offset due to the rapid influx of new buyers as the year progresses.
At retail we are expecting our customers to lean into more distribution. This year now that we have ample supply to support them. We're expecting approximately 1300 net new stores and approximately 1700 75 upgrades and second fridges this year.
We will be introducing a variety of new products. This year with many of them launching towards midyear or later stay tuned for formal announcements down the road.
Based on our success in the U K and Canada, we're going to invest further in those markets through increased media to support expected distribution gains.
We're also beginning phase one of our launch in France, we've been testing in about a dozen grocery stores in France for much of the past year and are ready to move to the next step there expanding into a larger number of stores and beginning of media investment in several markets. Our goal is to not only make this market a success, but to also validate that.
Our process for qualifying and launching into a new country can be done more efficiently than we've done in the U K. So far we feel good about the progress, we're making there and have begun to prospect for our next country.
To support this anticipated growth, we will be starting up several new lines. This year as I mentioned earlier the capacity. We are operating today produced at an annualized run rate of approximately $600 million in February at the pricing in place then however.
However, as we grow we will run out of capacity on some specific items by mid year. So we need to bring on new capacity to support them.
In simple terms, we will have excess roasted meals capacity for much of 2022, but we will need to add rolls capacity mid year and fresh from the kitchen capacity by Q4.
In total we will have installed capacity with operations ramping up that could support almost $1 billion in net sales by the end of 2022.
As we get a better idea on the actual demand and mix. We will have in 2023, we will make the necessary plans to scale the capacity to better fit the demand.
It will come through the pace of adding staffing and startup timing however.
However, it is important to note that we will also be doing as much to create demand to fill that capacity as we can reasonably justify we have a unique first mover advantage and we want to convert as many pet parents to the fresh pet regimen as possible before any meaningful competition rise.
As significant as that capacity is we know that we will need more in 2023 and beyond.
The significant increase in lead times for capital equipment, and construction are causing us to revisit our capacity addition, plans, we're taking a prudent approach balancing our projected growth the new lead times and the significant inflation in the cost of materials.
The bottom line is that we aimed to be as efficient with our capital as possible to meet a rising rapidly rising demand and we are amending our credit agreement to provide the necessary flexibility.
Well, let me be clear the fundamental strategy and goals have not changed.
We will be putting added emphasis on projects that build on our existing infrastructure and resources and enable us to scale, our production more quickly and in smaller increments.
Those adjustments to our capacity planning do not impact our 2025 goals to deliver 11 million households, 1.25 billion in net sales and a 25% adjusted EBITDA margin.
Rather they ensure that we can reach them in this more fluid and complex operating environment, well being as efficient as possible with shareholder capital.
We remain very committed to those goals and believe the plan we were laying out today will put us well on our way towards achieving them.
Before I turn it over to Heather Let me briefly summarize the key points I want you to take away first.
First we have finally refilled the trade inventory in hand, and have ample capacity to support reliable and consistent retail availability. This will allow us to get back to doing what we do best I E drive the growth of fresh pad.
Second we have developed a conservative plan that is designed to insulate the business from the numerous external factors that have impacted us over the past two years and others that we may not have encountered yet so that we can maximize our first mover advantage in this uncertain environment.
Third we have put in place the necessary building blocks to rebuild our margins, including the new ERP system that is now operating the higher pricing to offset inflation and a more stable workforce that can drive productivity improvements in total I believe we are very well positioned to deliver the growth and profitability that fresh pet is capable.
I'll now turn it over to Heather to provide a summary of Q4 2021 and the details of our 2022 plan.
Thank you Barry and good afternoon, everyone.
Let me begin with a quick summary of 2021 .
As we announced in January we delivered $425 5 million of net sales in 2020 , one an increase of 33, 5% versus 20, farnell and our fifth consecutive year of accelerating growth.
In Q4, our net sales were 37, 1%.
$115 9 million.
Adjusted gross margin for the year was 44, 5%.
A client with 380 basis points.
In Q4, our adjusted gross margin was 41, 7% a decline of 410 basis points.
The reductions were largely due to inflation.
Temporary operating inefficiencies incurred as we rapidly scale the business without data system in a turbulent environment.
So it was this year, coupled with higher freight costs due to inflation and our temporary inefficiency flow through to the bottom line and resulted in adjusted EBITDA for the year of 43 million a reduction of eight 5% versus the prior year.
Adjusted EBITDA for Q4 was $9 7 million.
<unk>, a 25% versus year ago.
That decrease was due to the same factors plus a higher marketing investment in the quarter than in the prior year, which was 11, 9% of sales up 620 basis points from the year end out.
We are not happy with those results and now we can do much better we have taken the necessary actions to remedy the problems, but they will take time to flow through our P&L. The access we have taken are.
First increased pricing, we announced two price increases that in total will increase our pricing by 17, 2% when fully in effect.
The first price increase went into effect at the end of November and the second price increase went into effect today.
The impact in fiscal 2022 will be approximately 15%.
So those price increases were designed to cover the margin impact of inflation in our input costs freight and labor.
Ever I caution that we are operating in a very dynamic environment and those call, particularly freight remain volatile.
Further pricing as needed we will take it.
<unk> implemented a new ERP system. This system will enable us to plan full truckloads, rather than ship half old truck.
And greater leverage on our freight spend.
It will also enable us to implement a pricing system. Later this year that rewards customers to order efficiently I E in full truckloads and full pallet.
Third invested in training and retention the wage investment we made last year is designed to drive higher quality operation.
Chris skills of our workforce and we are seeing signs that it is working.
<unk> invested in automation and equipment upgrades.
We shut down our lives last year to install some new automation and you'll also upgrade some of those are all there putting it we have seen the benefits of those upgrades.
And fifth invested in new technology capable of increasing throughput and reducing costs.
Time goes by a higher and higher percentage of our capacity will be comparable to the equipment. We have in kitchen, two which requires fewer people to produce more product.
I will start off our next manufacturing technology innovation in March.
Each of those efforts are underway and we will gradually begin rebuilding our gross margin to historic run rate.
Well it will still encounter some unevenness and costs associated with rapid growth and the addition of new capacity. The overall trend should be very favorable.
Turning to our guidance for 2022 daily.
Billy outlines our net sales guidance of $575 million and the rationale for it.
We'll instead focus on a call and profitability.
Our first priority is to fully support our growth via a significant increase in our media investment.
We expect to spend about 12% of sales in media in the U S and it will be front loaded to begin selling the excess capacity Billy described.
This is important so that we can jumpstart our household penetration increases again.
Due to the massive out of stocks, we had last year and the delays in marketing investment. We only increased household penetration by 6% last year, well below our long term rate of approximately 24%.
We are quite confident that our media program well the store that growth rate, even in the face of higher pricing, but it will take a little bit of time.
As you also heard we are increasing our media investment in Canada, the U K and for the first time in France.
Those efforts are part of a long term plan to develop a robust international business and eventually have the scale to justify European sourcing.
Until then those markets our investments for all with the costs well in excess of the contribution we generate but the total cost is very manageable within our P&L and is not big enough to justify breaking it out separately yet.
We are also investing in our organizational capability. So that we are prepared to support a much larger business and can continue the kinds of innovation, our customers and consumers expect from us.
We are adding talent, but it will be at a rate that puts us on track to deliver the 1000 basis points of SG&A leverage we committed as part of our 2025 plan.
Adjusted gross margin has lots of moving parts this year.
We are squarely focused on two important measures of our success.
Run rate adjusted gross margin of the fully utilized Bethlehem campus and the overall run rate adjusted gross margin of the business before we incur the usual startup inefficiencies and earn it.
It's important to note that the Bethlehem campus will be operating very close to full capacity. This year and can provide a reasonable view of the profit and cash generation potential of fresh but at scale.
We believe that is a very important proof point for the long term value of the fresh cut business.
In today's Investor presentation. There was a chart that demonstrates that potential the chart shows that now the Bethlehem is operating at scale. It is generating approximately $145 million of cash before media investment and the adjusted EBITA in the media is 29, 2%.
As a mature business, we would expect to incur some media investment, but nowhere near the 12% sales. We are investing now to drive a 35 plus percent growth.
A mature business, we'd expect to spend much less.
And even if you charge the full 12% of net sales and media investment to the now full Bethlehem campus.
Cash the campuses generated would pay for the entire capital spent to build that site in approximately two years.
We believe that view provides greater clarity on the ultimate profit potential of fresh that at scale and justify continued investment in new capacity.
And as I indicated we believe we have significant room for further improvement by driving production efficiencies lowering our freight car and gaining the benefits of scale and our corporate overhead.
Within this year, we expect to drive improvement in our adjusted gross margin via pricing and increase messed up production on a higher speed line and elimination of the temporary operating inefficiencies through the systems and training investment.
Lindsay will faithfully production plant in there.
Neck, and any further inflation beyond what we have covered with our pricing.
Adjusted gross margin cadence will be lowest in Q1, as we have very little benefit of the pricing and systems improvement in virtually all of the higher cost in the quarter. In fact, if we had the benefit of the higher pricing for the fourth quarter It would add.
10 to 15 million in adjusted EBITDA in the quarter, we also incurred unabsorbed capacity costs, resulting from shutting down one production line in January due to the staffing issues caused by Amazon.
Total that means that we will produce very little if any adjusted EBITDA in the quarter.
Margins will improve significantly in Q2 as the pricing is fully reflected in our system and talent increased efficiency.
We expect Q3 to retreat sequentially due to the impact on the N at startup well, we will be generating smaller volume in advance of ramping up well.
With respect to Q4, we're expecting even greater margin headwind as we will have two new lines operating at reduced capacity and they ramp up but it should be better than Q1.
We will also begin to more fully utilize our new Dallas distribution center as the year unfolds.
Most of the year that D. C will be a cost headwind and we will have to ship products in Bethlehem to that D. C. In order to have the full complement of product available for our customers order.
By the end of the year, though it should be a more efficient way can distribute fresh that to a significant portion of the country.
In total we are establishing guidance of greater than $55 million and adjusted EBITDA for the year. However.
However, as Billy indicated that result is negatively impacted by several factors.
We are.
Excess capacity, we're carrying approximately $13 million to $17 million in buffer capacity costs. This year.
That capacity is designed to insulate us from any disruption and prepare us for the increased demand we expect by Q4.
This represents approximately 225 to 300 basis points of adjusted gross margin.
Two.
Temporary pricing versus inflation mismatch, our second price increase just went into effect with orders today, while our higher cost began flowing through our P&L in January or earlier.
We believe that this mismatch.
And approximate $10 million to $15 million headwind to our adjusted EBITDA in the first quarter.
Three adverse mix impact.
All of the trade inventory, we felt we did this year was on that which have a lower margin than our roll.
The trade inventory. We felt was largely competed completed in February so Q1 will have a disproportionate mix of bad.
After that our next Gen. One our lives and for planting at.
This year, we will have a disproportionate amount of production at our partner at kitchen, South until NFS fully operational late in the year that plant next will flip flop.
Self produced product in 2023, and it gets up to scale.
Taken together these variables are creating an adjusted EBITDA headwind of approximately $25 million to $30 million and an adjusted gross margin headwind of approximately 400 basis points.
So the size of the number we will call out the impact of the buffer capacity and our communications. This year. So that you will have a better visibility on it as we grow into our scale.
We are providing the balance of the information for perspective, but do not plan on updating it on a regular basis.
In closing we believe we have constructed a plan that prudently balances the need to restore the consistency and reliability of our operation.
We need to demonstrate the potential profitability of the business as it grows and also maximizes the size of the opportunity in front of us.
As challenging as the past few years have been we arrived at the place we are today with the resources and tools to fulfill fresh pest potential.
We remain very confident in our long term goal of 11 million households, one point to $5 billion in net sales and a 25% adjusted EBITDA margin and we believe we have the ability to change the way people nourish their pets forever.
That concludes our overview, we will now be glad to take your questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the sarkis.
In the interest of time, we ask that participants limit themselves to one question and one follow up one moment. Please while we poll for questions.
Yeah.
Yeah.
Thank you. Our first question is from Anoro Naughton with J P. Morgan. Please proceed with your question.
Hi, good afternoon.
Good afternoon I'm sorry.
Thank you for giving us some of the details until the risks considered in your guidance, but what gives you confidence that the 575 is conservative enough.
Encompass all of the one five type one time type of that set of songs you and others in the industry lately.
And then what about me is.
What do you see as a potential upside driver.
Paul.
Yeah, Let me let me just talk about the risk profile and then Scott might just give a commentary on where the upside part of it is but unlike most companies where demand is really the big question for them.
Our big issue over the last two years has not been in fact for the last many years has not been the absence of demand. It's been the absence of supply and so our entire risk mitigation approach has been focused on how do we get ourselves enough supply that we can let the demand rise to where it needs to be and as I said in the call.
Comments were already running at the rate that would support the 575 and so.
So we feel very good about the underlying growth rate here. Our big challenge is are we going to have enough capacity and that's what we've laid out a plan that we have significantly more capacity than the $5 75 would require I think the proof in the pudding was in January where we were able to take down a line and still keep up with the demand and not dig a trade inventory holes. So we feel.
Very good that we're managing the right element of risk here. It's the element of risk is not the demand side. The element of risk is on the supply side, Scott you want to comment on on the demand drivers in the upside.
Yes, certainly so I totally agree with Billy I mean, I think what he is getting into is for the past two years, we really have not been in a situation, where we've been able to supply customers or consumers, but the product and the products specifically that they are they are looking for and we're finally finally in the last like month or.
To starting to see those inventories come back we're starting to see our our our situation and our our appearance at retail are much better than it's been and the question. We're asking ourselves is what would the growth have been the last couple of years. If we didn't have that situation and were starting to see some of these pretty enormous numbers come.
Through both on the <unk>.
Nielsen.
In the weekly data that we're seeing.
And it really what it comes down to it's in stock. We also feel like the media performance and the advertising that we now have on air.
The best we've ever had and we know the correlation between the media and the.
The impact on not only driving penetration, but also revenue.
We're really confident in our innovation and we're also seeing really nice steady progression and distributions.
Feels like every single thing is lining up on the business behind finally, having enough inventory.
Yeah, and I would just close that with the you know the it is amazing. It is very different we are very different position than most other companies. We're managing risk means you manage the you know that the net sales via the the demand part of it we think the demand is our strength and the driver and it has been so we're trying to manage the risk entirely by <unk>.
Giving ourselves plenty of cushion plenty room on the supply side.
Okay. That's helpful.
Thank you. Our next question is from Mark Astrachan with Stifel. Please proceed with your question.
Yeah, Hey afternoon, everyone Hope all is well.
I guess just directionally following up on that you talked about I guess, what mid teens, 15% or so benefit from pricing. This year, you're guiding at 35, so that implies volume trends.
A lot weaker than where they were running a year ago, you talked about elasticity having.
Not a huge impact and obviously everybody else in pet is taking price. So maybe if you could kind of parse that.
Those two pieces out there and you know what.
Why this number couldnt I guess be potentially bigger I mean, they get wanting to guide conservatively, but price is obviously a much bigger piece of the puzzle this year relative to what it's been historically. So you know how do you think about that and then you theoretically I guess you talked about in the presentation staff capacity, which is still 100 million plus above what you guided to.
For revenue so.
Is that something that you can potentially meet it if demand is there again essentially to what Scott was talking about in terms of kind of the perfect storm here of advertising spend in innovation et cetera. So that's a lot, but anything there right helpful. Let.
Let me take the front part of it and tell you.
Remind because we did put up an awful lot into our prepared comments, but to the first part of your question about pricing.
Pricing of 15%.
We said in the in the comments was that the we built into our plan that unit movement would be about 10 points below what the net sales moment, where the the measured.
Movement would be so we're getting about a 10 point help instead of the 15 points that come from pricing. So that's the assumption that we've got in the plan for price sensitivity price sensitivity turned out to be less than that if it's a straight benefit to the bottom line that would imply five more points of growth from a purely from the pricing.
Scott do you want to just talk about the the upside that you see it based on the demand side of it.
Well, let me, let me touch just a little bit on what we know on pricing at this point just to level set everybody. If that's all right. So on dry we're seeing between eight and 12% on what we're seeing and I'm talking about like where it's going to land right and I don't have a crystal ball, but I'm just from what I can see so far it looks like it's 8% to 12% in <unk>.
It's gonna be 12% to 30% as we'd mentioned worried about 17% on the two increases together. The first one is in place.
The second one is effective as of today and that was in the script I think it's also in the presentation.
So we have seen a couple of specific places where there had been moves on a few items from.
From the first price increase moves on the on a few items for the full price increase already.
So let me talk about the first price increase in March.
I don't know if I can totally answered your question, but I'm going to give you pieces to the puzzle.
So if you look at the first price increase what we've seen so far which is about five between five and 6% depending on the item it looks like theres virtually no impact so far now its really hard to read because theres a lot of different drivers going on and we're getting back in stock.
Youll see a little bit of mix, but it looks like theres almost no price increase there were a few instances as I was mentioning where there there are a few skus at our some of our top customers, where they've gone ahead and moved all of it already.
One of those is our six pound chicken roll for example, and we've seen about a 15% price increase which would encompass the move from both the first and the second price increase or the majority of it and.
And that item over the course of February is up 86% and that same retailer.
No.
It's really hard to read but it looks like we are moving through the pricing really really well.
But we again, we don't know where it's all going to land, we don't know what's going to happen when the entire.
The entire lines up but it looks very encouraging at this point and as we were touching on that.
Got you on earlier from a demand perspective, it looks like consumers are waiting for us to get back in stock and get back into a get back into our products.
Thank you. Our next question comes from Steph Wissink with Jefferies.
Please proceed with your question.
Thank you good afternoon, everyone I wanted to pull on the common thread here again and try to stress test your plans for distribution. So you talked about demand and what your anticipation is for maybe a little bit of household penetration destruction, and then revival in the back half to talk a little bit about the retailer conversations and how your commitment.
Or in terms of project fans and I think you also mentioned some larger refrigerators just help us reconcile the guidance with what portion is.
Unit growth demand growth versus <unk>.
Our mental accessibility growth with distribution. Thank you.
Got you.
Yes, absolutely the vast majority of our growth this year is going to come through penetration and buying rate.
The biggest piece should be penetration.
Do we think about it is our advertising and marketing should drive about 80% of our total growth.
In the year and some and then the last two pieces a distribution and innovation should be the other the other drivers. So I would say about 80% of our total growth should come through our marketing and the advertising that we're putting in place. So it is it is the key driver, although we are getting more stores and.
We have in the presentation, you'll see there's a lot of information I know youll see about over 300.
New stores Youll see significant increases in our not only we upgrading or almost a thousand fridges, but we're also adding.
Fair number almost 902nd Fridges. So all of those pieces are coming into play in and the one thing I will say is I think we have been very transparent with the retailers and in all of our communications all along the way we have been far from perfect, but we have delivered lots and lots of bad news and I think we've laid.
The plan that we share with them early last year about what we're building, we're now being able to show them not only what we're building tangibly.
Kitchens to and what we're doing in N S and kitchen, south, but now we're actually starting to really fill trucks at different types of levels.
And I think that there is a tremendous amount of confidence in and working together with us to really build out the first pet food category.
Thank you.
Thank you. Our next question comes from Bill Chappell with <unk> Securities. Please proceed with your question.
Thanks, Good afternoon.
Good afternoon.
Just wanted to understand I guess.
Two things one on the absorption and one on kind of the sales of refilling the shelves on the absorption.
Is this basically you're building safety stock and even if if demand is greater.
Then than you expect you want a high level of safety stock, which I guess could go steel throughout the year or could that number come down meaningfully.
If demand goes up and then on the revenue and in terms of filling the channel and I think we expected last quarter. Your initial expectations were much higher than consumption growth as.
We're refilling the channels.
That didn't happen because of the supply chain issue. So I would've thought that you would have a big bump in this first quarter.
As you finally be filling the fridges is that not the case is that just happening more throughout the year or am I missing something so I guess first help me understand the assumption that the absorption and how it works through the year and help me understand the kind of the flow of revenue as we fill the shelves.
Bill Let me take the second part of your question and then Heather I'll answer the first part of your question, but in the second part of your question are we pretty much completed the trade inventory refill as of this week.
We've been shipping very strongly and as I as I indicated in the prepare.
Our prepared comments, our net sales are our sales to date are up about 38%.
Last year's March was a little bit last year's February was weak. This last year's March was much stronger because we were bouncing back from all the storms we had in February .
So you would expect that we got some we got some benefit.
And we know what we're giving you is our projection for the first quarter that will kind of be online with where we want to be I would also just caution that we are doing as we said we completed our ERP conversion and are we feel very good about where we are but we just wanted to give ourselves a little bit of breathing room. In case, there are any glitches or any issues with trucking or anything else that might happen like happened in.
In Q4, so we're trying to be a little bit cautious and conservative on it but the trade inventory refill is pretty much done fresh in my kitchen, what's going to be the last thing, we refilled and we haven't cut a case on fresh from the kitchen in three weeks. So we've been shipping pretty full how do you want take the first part of the question.
Sure Yeah, So Seville.
I see.
Destock the way you ought to think about it is really called buffer capacity, it's really stacked capacity in our in our cost structure. So we're planning for a stacked capacity that supports our business that could be upwards of 15% greater.
So if we had no supply chain kind of operational issues and things.
<unk> two operated smoothly with no disruption then increase that increased demand can be supported by the fixed cost structure that we had in place 15% Laura having.
Having said that.
In March where we might have some sort of operational disruption and we talked about in our prepared remarks around what happened in January with almost gone, where we shut down the line. During the month of January that allowed us to sort of operate and support the demand that was there without disrupting customer service and some of that.
Does eat away at that suffer but having said that it allows for that disruption without missing any sort of.
Missing or ourselves God protect on the upside and if we do have the upside than that of course takes away the margin impact as well.
So just to be clear as he moved to the fourth quarter, you would expect kind of the run rate of that absorptions to be kind of <unk>.
Low single digit millions is that is that right I mean, you're starting high and then you're kind of growing into it you wont hold this kind of level forever.
Yeah, I mean, I think we will always plan to have some buffer capacity given our level of growth but.
But having said that you know it.
The outcome of how this impacts the financials will depend on you know.
How things progress if we.
We could see a margin impact and absorb and not absorb any of it is every month, we have some sort of operational constraint, which we don't expect to have them like January but having said that we could also support higher demand and that's why we're spending you know on media had.
And trying to invest for that increase growth, we can absorb that with this buffer capacity as well so body by the end of the year. It will either result in higher demand supporting higher demand and so therefore, you would achieve a higher margin or it would support the died and not impact.
And because we have that buffer capacity there.
Thank you. Our next question is from Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Thanks, I was hoping for a little more clarity on slide 37, where you show the profitability of Bethlehem campus.
When when it's $535 million in sales.
And I guess, that's what I'm questioning is.
Your your total company is not at $5 35, yet so what's the what's the sales basis for this scenario and then how do you how do you come by these numbers that shows the cash generation.
Heather you want to take that.
Sure. The 535 is a capacity in view of the Susquehanna campus right. So and what we've done is we've taken and this is simply a reflection of.
The capacity of the facility in revenue the cost structure related to that which is now.
It's not a fixed because we will continue to drive it.
The initiatives and drive cost savings initiatives to even improve that but as it stands right now when you look at that net sales capacity with the current cost structure of that.
You have a 50.2% margin so.
So that's that's the first stopping point than what we've done is we've taken our fair share.
SG&A expenditures.
So haven't you have what does that what are the contribution to that facility look like.
And again that's.
That's the current shade.
Our SG&A expenditure, which we know were working on.
Driving further improvements via scale growth leverage in G&A as well as well.
Logistics scale, so that that will even improve it but we wanted to take sort of a stopping point to say what is this worth now knowing that it will even get better and that's what that margin represent.
Okay, Ryan just to clarify.
Just to clarify one point the $5 35, it says in the footnote down there as a total company sales of $600 million. It would mean that if we were deciding to use all the capacity in Bethlehem and source. The rest of the stuff that we used to get to a $600 million number would come from other sites. We may choose in depending on the mix of the products that we sell this.
Here, we may choose to not have some of it come from Bethlehem some of them might come from kitchen, South there might come from and it's depending on what kind of data somewhere where it is but at the capacity and staffing plan that we've demonstrated in improving their operating today. This is what you deliver at the pricing. This is at the full year.
The full year of the pricing that's in place as of today.
So it's also.
It also assumes all the pricing goes through as well yeah. That's it that's in the footnotes full year benefit of the 228 22 price increase okay. So it's it's all it assumes all of your pricing is offsetting the inflation, which has been substantial but that's right.
Hum.
It just results in basically a two month to month correction because you didn't have the pricing in January and February but you had the costs.
Okay I'll I'll stop there. Thank you.
Great.
Thank you. Our next question is from Brian Holland with Cowen. Please proceed with your question.
Yeah. Thanks, good evening.
Just to clarify here on the guide and the 13% to $17 million.
Youre Frontloading your media spend I think Billy you mentioned potentially leaning heavier into the media spend as we go through the year. So.
Is the thought process here that as long as the risk factors that you laid out that are supporting the why you would want to have that buffer capacity in place. So as it comes online on time or no further delays than what you've currently projected everything else is okay, and you're seeing the correlation between your media spend in your sales.
You would lean into those you would lean into that excess convert buffer capacity in the second half of the year through increased media spend that would close the gap between your buffer capacity, which is $660 million and and we would lose the unabsorbed costs I'm, assuming that's what you chose to do with it.
Is that the way to think about that.
Conceptually you're right, there's a timing issue and all of those in that scenario that you laid out where as we said we're frontloading the media to like 65% first half 35% in the second half if we found ourselves running towards net sales that were well in excess of what our plan is we would have the opportunity to add more <unk>.
In the second half you wouldn't get a significant benefit it was more carrying you towards the next year, but you would have that opportunity, but there are lead times, both on the media commitments as well as on the you know, making sure you ramp up all the right staffing the right places we will have plenty of staffing to support a significant part of that we just want to make.
Sure. They were also reflecting whatever the risks are that are out there whether they're transportation risks whether there are ingredient risks whatever there could always be some of those other elements that constrain us and we just want to make sure that we have the capacity before we lean into the higher level of media.
Yeah.
Understood and then just on the media spend.
You mentioned international and you're talking France into that mix now in and leaning heavier into that.
And maybe I don't know if it's possible to dimensionalize between kind of like media spend behind North America or U S. Specifically and the rest, but if we think about that you know how much are we spending on the U S relative to say, we're leaning it heavier there or has that been crazy.
It's like you're 90.
Yes.
Yeah, it's like 90% U S is the way to think about it.
Bryan Bryan strategically and conceptually we source the U S to where we think it needs to be before we put the revenue into the other markets, but it's a media and of the other markets, but we have more than adequately funded the other markets, but we do not.
Put media money into those countries at the expense of the U S.
Thank you. Our next question is from Peter Benedict with Baird. Please proceed with your question.
Oh, Hey, guys. Thanks.
Two questions first can.
Can you hear me talking about the Capex budget I just kind of.
See that this year and maybe next.
And how kind of the maybe the borrowings are going to flow. That's that's my first question.
Andrew do you want to take that.
So I know we touched on them in the prepared remarks that we're looking at our plan.
And we are doing that but from a 2022 perspective from a spend perspective, it's largely in line with what we've shared so just from a financial perspective.
And you know where we're reviewing our plans as we see.
Said.
Of course, as you know from a marketplace perspective theirs.
You know longer lead times and inflation that were facing but also against and looking at the refine plans, it's really around taking it as an opportunity to look for capital efficiency and ways to optimize them and so one of the things that we arguing is looking at our existing infrastructure and how we can continue.
Continue to expand on our existing infrastructure as well as increase.
That's it in smaller increments. So so it's all in the works and what you should know from a funding perspective consistent with what we shared at ICR is that we're looking to amend our credit agreement at this point to provide the flexibility to support those plans.
Okay and then.
Just wanted to clarify kind of the cost for you.
That's that's.
Guess embedded here with the inflation.
Are you just assuming that the cost that you exited the fourth quarter with.
Or kind of what's going to persist for the rest of the year or is it more what you're seeing today, you're assuming continues the rest of the year or are you assuming either any relief on the inflation front or.
Incremental headwinds and I understand that cost inflation is.
On commodities, it's odd freight it's on a whole variety of things, but just trying to understand how you built this plan from that perspective.
Sure so.
First of all this reflects what we know of course exiting 2021, coupled with what we locked in in terms of our chicken contract, which is a meaningful piece as well.
It contemplates our expectations of inflation for this year for the full year as best we know it right now and a lot of what we buy is on a contract but there is variability of course within the cost structure. As we saw of course in 2021, and what you see in terms of the margin impact is a reflection of.
Our best expectations of this inflation, but a mismatch really around price versus inflation, where the second price increase as we mentioned starting today. So you mid thing you know when you when you think about when that comes in it's about two and a half months of the mismatch in terms of price versus inflation.
Okay.
Thank you. Our next question comes from Bryan Spillane with Bank of America. Please proceed with your question.
Hey, good afternoon, everyone. Just just to two quick ones from me. The first one maybe this is just.
I'm a little dense on this but if we're looking at the $660 million.
I guess staffed capacity.
At Q4, how much of that does that include both price increases and I guess, just trying to think available capacity for 'twenty three.
How much how much of it has been increased I guess, just the pure pounds versus dollars available, but just because you've got more pricing now contemplated then I guess you would have thought a year ago. So I'm just trying to see if there is.
There's actually more pounds available pound capacity available.
And that there's not a risk that you can if you over deliver on volume that that creates some some additional tightness of capacity.
So it's it's a little bit complicated because there's a lot of moving parts in there first we actualized all of the capacity numbers based on what our our one experience has been you know the efficiencies we're seeing the yields we're seeing we 660 number that we had been sharing before had been prior to the assumptions for price increases.
So theoretically there's the increased value of the price increases that would would flow through.
There is some mix differences because those different items the capacity doesn't necessarily all match up with the same size of the price increases. So there's some moving parts that are in there.
If the broader question is is there some risk that we're gonna be tight on pounds capacity.
In this plan.
We think we've got plenty of headroom and we have the ability to flex the headroom quite a bit if you think about what we said in the prepared remarks.
The first place that we could be tight is gonna be on rolls. The bowls line, that's coming up in the third quarter now from N. S is going to be we're going to be tightest unrolls.
When we get there once that comes on it is such a large increment of capacity, we should be fine enrolls for for a while the next place. We're gonna have capacity tightness in pounds will be on fresh from the kitchen and natural will be heavily dependent on the bag line that comes up in that and that's what you'll be coming up in the fourth quarter.
But we'll have lots of roasted meals bag capacity. So if the demand that comes in as it comes in throughout the year is on roasted meals Theres no issue with available capacity, depending on where you are in walls and fresh from the kitchen, you could be just short of.
Capacity coming on but once it's gone you have we have more than a pound of capacity and the ability to expand that pound capacity through incremental staffing hours. So it's a long winded way of saying I'm not worried about the pound side of this thing I think that we're pretty well prepared for that assuming we get the construction of emmis up in.
Get it started up.
Okay. No. That's helpful. And then maybe just one second question Bill is just.
Can you just give us a sense or your perspective on just how competitors.
And the fresh segment coming into the market.
Have impacted the demand for fresh and I guess, we've seen a lot of advertising for the farmers dog and <unk>.
And their social media following right as followers have increased.
Substantially in the last six months.
You've got I guess, just food for dogs now and Petco.
Distribution there in frozen so I'm just trying to understand if you see more competitors coming into the market is it actually just expanding awareness of fresh. It's just good for the segment in general or are you concerned at all about just the competitive dynamics eating up.
Well I would say that where the world is exploding in our case and it's just making the opportunity that much bigger, but Scott can give you a lot better color on it.
Yeah. So obviously, we take keep a really close eye on all of this and I think maybe the best place to answer that or to start with that is when we look at where the future state is and you know you've heard us talk a little bit about that but we believe that that you know the future state for fresh and fresh.
<unk> frozen however people want to divvied up it's kind of a 6 billion dollar kind of piece of the pie. Some people have seen for some people seeing sex.
It's a very very big piece of the category into the future. So there's a tremendous amount of potential I mean, obviously our goal is worthy incumbent we think we have an incredible prompt proposition portfolio. We built a we've been really thoughtful to try and build a really really good business.
So we've seen a lot of people come in over time I mean, there was a I think you remember probably a few years ago. There was a billion Margo product and there was a farmer's market product.
The frozen DTC guys have they've been around since like 2015 2014 2015.
Pick your number they've been growing they've grown to well over $200 million in retail.
Retail number so we've seen a lot going on and all during that time, we've been able to maintain a 25 30, 35% growth rate depending on the year. So we think theres, an incredibly big Tam, we know that we've been able to grow incredibly well through it and then as we've watched some of these competitors come to market.
Multiple different classes of trade typically our performance has not been impacted whatsoever at the retail with Iraq, and we've also tend to outperform them significantly.
So I mean, it's interesting I mean, I think that there is a piece of business there I think that.
We're going to have the vast majority of this kind of pie and I think that theres going to be several other people that are going to try and give you up the smaller piece of the total market.
Then the other thing I will say is.
What the other people have done from an innovation standpoint, and how they've thought about it.
We have not been we have been paying close attention and I think that they have uncovered some consumer opportunity and it's something that we've been working on and we think we're going to later this year. The work that we've done and the innovation that we're going to bring will completely up and the DTC landscape.
With with many of those brands coming in so I think we're really well positioned.
I know, it's our company I know I'm one of the founders I know, it's hard to not be incredibly bullish, but I think we're in a really really good position.
And I think that those guys will make progress I think we're just going to make so much more progress and have so much scale and so much knowhow and also b fresh, which I believe is better than frozen.
I think we're going to end up in a really good spot.
Thank you. Our next question is from Jason English with Goldman Sachs. Please proceed with your question.
Hey, good afternoon folks.
So there the capacity.
Getting them right sized.
You mentioned the step up in media to 12% of sales can you could you tell us where you finished 2021 out.
Heather do you have that yeah I do we finished.
I'm, just calling up at.
That's kind of a little over 10, 5%.
Okay.
So this was the biggest year of year on year increase in media spend I think in the company's history.
But youre pointing to it as a driver of the slowing penetration growth how do I put those two.
I mean, the biggest Houston I think restaurants.
Scott go ahead.
Yeah, Jason I think it's a it's a really it's a really key point.
And.
The biggest challenge. We've had is we've had periods, where we are completely out of stock on cat food. We're completely out of stock on bags are completely out of stock on rolls in over the course of the year you can see those moves where when we are out of stock on those specific items that people tend to really prefer like form.
<unk>, which is really the first decision that people make.
We lose those people for periods of time now what I can tell you is when those products come back in stock.
Growth rate is extraordinary and it's it's explosive I can show you to you like by item. So when we finally get all of our products and I think we're gonna have really really significant explosion in our penetration.
Now, it's I think it's an interesting way to look at it but in a way.
Being having all of that adversity, this past year and being able to put up the growth numbers that we put up and it coming more from buying rate.
I think it demonstrates the dedication that a lot of consumers have to our product and how they were willing to stick with us because quite honestly, we did not we aggravate a lot of folks.
So we're keeping a close eye on it.
It looks it appears like we're off to a really good start the business is responding well to media already this year you can see it in the groceries.
Youre going to see penetration, it's always just slightly trailing indicator before we get into the data, but it looks like we're there.
We're going to be back on track with our penetration growth.
Well Scott in terms of back on track you were running sort of low to mid teens penetration growth pre COVID-19 and doing over the last two years.
Your two year CAGR. So during COVID-19 is around 16%.
Why isn't that on track like if I heard you cite a 24% number I'm not sure where that is but at least on the data. We're looking at your longer term CAGR on penetration has been sort of mid teens.
But you're you're you're underwriting something above trend what gives you that confidence.
But let me just take a shot and I think I'm not sure what data youre looking at on the penetration numbers, but it is as we think about the the the penetration the penetration gains were in the twenties for back to back years in a in a year's 19 and 20 and when we look at it and look.
The media spending and the conversion from that.
It's been a very consistent rate and consistently improving rate with the only year, where we are off was in 'twenty, one and we're off because frankly the out of stocks, we had a better than expected year in 'twenty because of all the pandemic related stuff, but we are 21 the efficiency in 'twenty, one for a conversion of media into.
<unk> penetration was better than what it was in 19. So we saw continued improvement and so if you convert the media spending that we're planning this year into household penetration, we feel comfortable we're going to get back to where we were or the trend line that we're on.
Thank you. Our next question is from <unk> Parikh with Oppenheimer. Please proceed with your question.
Good afternoon. Thanks for taking my question and then I'll be quick here. So just in terms of the guidance of $13 million to $17 million Unabsorbed expenses. So if we see higher sales during the year with the flow through will be higher than normal for these cells.
How did you want to take that one.
But perhaps can you just clarify what you mean, yeah, yeah yeah.
So you already have these costs built into your base of $13 million to $17 million. So if you end up seeing higher sales in your guidance would that flow through on those incremental sales are higher than normal.
But yeah, you'll you will just have the variable costs on there. So we will basically improve margin for each dollar of above them you get a margin benefit because you don't increase the.
The plant costs related to that.
Okay, Great and then maybe that would make sense right.
That's right in our slide deck, as well, where do you see the adjusted EBITDA impact on the furniture as well there.
Okay, Great and then just one more quick question I know labor availability and freight costs were a headwind last year. What are you guys seeing right now in a waiver availability front and then for free cost I know, it's very volatile out there have you seen any stabilization or is this still hard to conclude where it's going to end up.
I'll tell you I'll take a shot at that the labor part we think the move that we made last year is was the right one and it's working and we've seen.
An improvement in our retention rate or you think of it as we've cut in half the turnover rate that we were seeing before.
And so we feel very good about the move we made it's not doesn't mean that we're perfect. We have to stay on top of it. We also did some changes in the employee benefits that are designed to better meet the needs of the of the younger workforce that we have today, but we feel like that move has worked and we're not worried about labor availability at least not for the for the foreseeable few.
Sure.
On the freight side is that is that is a tough market.
We're seeing you know cost go up because of fuel costs and we're also seeing the availability of trucking. It is better now than it was in the end of the fourth quarter, but it's still not what I would call. It a.
Great place to be works for a far way, we're a long way away from being in balance and stable on freight transportation at this point.
Thank you. Our next question comes from Jon Andersen with William Blair. Please proceed with your question.
Good afternoon, everybody most of my questions have been asked and answered just one quick one.
The new fridges for 2022, there's a step up.
It sounds like more than 3000, whether that be new stores or upgrade your second fridges.
Can you talk about first the cadence that you expect.
Through the year and second.
A little bit of color around.
Where these placements and upgrades are going to be concentrated and what.
That typically does for you does it drive household penetration does it drive Bayreuth buy rate.
It's the kind of the.
The benefit is reflected in your primary drivers of your business. Thanks.
Hey, John .
From a cadence standpoint, we believe they're going to be fairly evenly spread through the year.
More so than we've seen in certain years, but I would say fairly evenly split.
It ended up like a 60 40, but it's going to be pretty darn close.
Kind of an even spread.
Where we're getting those placements.
Part of them are I'm almost all of them are existing customers. There is a couple of newer customers, but almost all of them are existing customers at this point, where we're just expanding distribution and storage were not.
On the second fridges those are stores that are performing quite well and are now either being remodeled though there is a situation where they deemed it where they feel like it.
We have the need and enough velocity and.
And demand to add to add a second fridge in there and the way we think about all of the fridges being placed not only new but also second fridges as we use them as a multiplier effect on our on our marketing our on our advertising. So so if we have a year, where we have extraordinary.
So we think of the you know it's interesting because Jason was touching on this question a minute ago.
When we think about acquiring consumers, we typically look at it from a cash basis like a consumer acquisition basis. So what does it cost us to acquire a consumer for our business and the range has been call. It.
45 to $55, let's just say that's the rate that's the range is pretty close and there it depends on the year and depends on what's going on if we have a year, where we get extraordinary placements. We have really good advertising and really good innovation youre going to see things.
On the lower end, so like a $45 CAC or so.
From an acquisition standpoint, if we didn't have any of that you might see kind of 55 or slightly higher than last year was an exceptional year because of the out of stock issues.
But that's kind of how we think about it and how it helps kind of think.
Think of it as a complement to the overall kind of growth on the business again about 80% of the growth is driven in marketing is.
The marketing of slightly more effective because we get a lot more fridges, there higher visibility fridges and we have really good innovation. So.
That's really kind of how we we typically kind of think about building the revenue model for the business.
That's helpful. If I could squeeze one follow up in on innovation.
Billy I think you mentioned a good slate of innovation, mostly mid year.
No you're not going to talk about specific items not asking you to talk about specific items, but can you talk conceptually about the size of the innovation pipeline and maybe the focus of it.
Type of dog occasions.
Different forms just to give us a sense for what.
We may be opening up here in terms of incremental Tam. Thanks.
I don't think we have enough time for Scott to answer that question [laughter].
Hum.
Yeah, So John .
It's a it's another one of these things where we spend a lot of time thinking about and I think we've gotten to a point, where we know when we're adding innovation the innovation is going to.
Prove our business performance, we're not because we like some people have unlimited shelves right or the potential of unlimited shelf. We don't we have we have our fridges and we sometimes a second fridges. So we want to be very very prudent and thoughtful in the innovation, we're bringing to market. So when we're testing innovation. It has to be more successful than what we already have out there in it.
It has to bring incremental consumers into the into the business into the portfolio.
So that's really how we evaluate it. So we have we continue to always identify where are their gaps and where are there opportunities.
One of the things. We've seen is there is a lot of opportunity around the site specific items certain sizes of dogs.
So certain aspects around sustainability people are really interested in we're going to do more and more around sustainability youll see different things that we're doing on our lines and our businesses and our products.
We're also gonna see more and more plant based items continue to come we think theres a tremendous area of opportunity and then finally, we know that convenience and customization is really really interesting to a subset of consumers and that's really what we want to we want to tackle and we think that we have an opportunity from a fresh perspective.
An amazing job cuts.
Customizing and creating a very convenient products for for consumers they feel very specific to their pets.
So there's a pretty broad array.
Probably I think late this year, we'll probably do a very extensive sharing session.
With the you know the investor and analyst community and we'd love to share more details at that point.
Okay.
Thank you there are no further questions at this time I would like to hand, the floor back over to Mr. <unk> for any closing comments.
Great. Thank you let me just leave you with one thought from American Humorist, Corey Ford properly trained a man can be dogs best friend to eliminate any doubt properly trained means that you know to feed fresh pet every day.
You for your interest and attention.
Good night.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Hum.
Yeah.