Q2 2022 Freshpet Inc Earnings Call
Greetings and welcome to fresh Pet's second quarter 2022 earnings call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Jeff Sonic Investor Relations at ICR. Thank you you may begin. Thank you good afternoon, and welcome to fresh Pet's second quarter 2022 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Heather Pomerantz, Chief Financial Officer, Scott Morris Chief operating office.
<unk> will also be available for Q&A before 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 in 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 adjusted EBITDA among others.
While the company believes these non-GAAP financial measures provide useful information for investors presentation 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 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 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 results and guidance that we'll discuss today.
With that I'd now 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 the dual challenges of inflation and economic slowdown, which has resulted in unwelcome volatility in our results have not derail our ability to deliver our long term goals, including significant margin expansion during.
During this call you will learn that first net sales are strong and growing in line with our expectations.
Sensitivity is modest and also in line with our expectations.
Household penetration growth has accelerated and it's more consistent with our long term goals. In fact, our net sales growth is outpacing our long term plan, which only requires a 28% compound annual growth rate to achieve our 2000 2025 goal.
Second adjusted EBITDA was below expectations in the quarter due to media investment timing inflation logistics challenges and the quality issue we had in June .
We've already taken the necessary actions to adjust for the critical issues, including announcing a third price increase.
However, the cost of the quality issue and the new timing gap on inflation versus our pricing require us to lower our adjusted EBITDA guidance for the year to 48 million from $55 million.
Third we are updating our capex expectations to reflect our current best estimate of the actual timing, we will experience with our various capacity addition, and <unk> expansion projects. Our initial estimates were very conservative and designed to give us significant flexibility, but now that we are more than halfway through the year.
Have much greater visibility and expect that we will spend approximately $80 million less this year than the $400 million previously projected.
The impact on our available capacity will be minimal and still leave ample room to grow at or above the rates we had projected.
And for the underlying health of the business, but its growth potential and the underlying margin structure remains sound.
Spike the litany of new obstacles and our own admitted missteps, we deeply believe that fresh pet remains one of the best growth opportunities in the CPG space, if not the broader consumer sector. We have consistently demonstrated an ability to grow the business at very strong rates and have now done at higher prices proving the pricing power.
The brand importantly, our growth is the result of very solid and sustainable consumer fundamentals, including strong increases in the size of our consumer franchise.
Steadily increasing buying race <unk>.
This combination is only made possible by strong satisfaction and high customer retention.
Retailers are responding to that strong consumer interest and now realize it fresh pet is the future of pet food. So they are increasing their placements of fresh pet fridges and the number of stores with double and Triple fridges. It is expected to grow dramatically in the next year, we already have more than 27000 fridges in stores and retailer interest is growing.
Not shrinking.
But the strength of our competitive moat goes beyond our retail presence as we are now building increasingly efficient manufacturing facilities that are unlike any others in the world are existing freshmen kitchen, and Bath Lam is operating at full capacity and producing strong cash flow and we are out to open an even larger and more efficient facility.
And then as Texas.
We have consistently demonstrated an ability to capture the benefits of increasing scale in our G&A costs and we aim to demonstrate our ability to deliver consistent gross margins as well regardless of the operating environment.
Finally, with a strong balance sheet in combination with the cash generation of the business and our credit agreement, we can support our long term growth ambitions without the need for additional capital. There are very few businesses that can say all that.
Well the past two years have presented some very unusual and difficult challenges. We've worked diligently to ensure that fresh pack can achieve its potential and change the way people nurse their pets forever.
For much of that time, we did not have enough capacity to meet demand, we outgrew, our ERP system and labor shortage, it's plagued the business regularly but.
But we solve those problems today, we have enough capacity to meet demand with more coming online soon the stores are in much better shape with steady improvement in fill rates and better in stock conditions.
We've implemented a new ERP system to enable greater efficiencies in our proactive fresh pet Academy approach to labor has turned a weakness into a strength.
But it goes without saying that the backdrop, we are facing today is very different than what we've experienced over the past several years, making it hard to see and appreciate those accomplishments and the potential of the business.
We have replaced a pandemic with inflation yet we've unfortunately kept the supply chain problems that came with the pandemic and now we are facing a potential recession.
We recognize the desire and need to stay aligned with if not ahead of the shifting macroeconomic forces ramping inflation and higher interest rates necessitate strengthening our focus on the cash generating capability of the business while simultaneously delivering the long term 11 million household prize.
While the recent challenges have caused inconsistency in our margin delivery performance. We are in a much stronger position today than we have been over the past two years with a more formidable organization that provides greater control and confidence in the long term opportunity at fresh pet presents.
The new capacity plan that we outlined in May provided some early hints how we might make better use of our cash including a realignment of where we built various increments of capacity the use of leases for non strategic assets and a focus on more space efficient technology.
But the current environment requires that we go further.
There are three areas in particular that we need to focus on <unk>.
Capital spending startup expenses and working capital.
Each of these is unnecessary use of cash to support our rapid growth, but we have significant opportunities to improve our capital efficiency improved to investors that fresh pet can add scale and as we scale generate significant operating cash flow and ultimately free cash flow.
Key to accomplishing that will be to continue strengthening our organizational capability and processes for.
For example, our new ERP system is operating and supporting our day to day operations, but we're not getting full value for its expanded functionality.
That has led to inventories that are larger than we need less efficient use of freight and higher accounts receivable balances.
We've put in place a highly focused team designed to capture those benefits Asap.
Encouragingly since the quarter ended we have implemented a more timely billing process, which will dramatically reduce our accounts receivable by the end of this month.
Additionally, we are focused on getting new capacity online as fast as possible and that has come at a cost.
That was necessary because we are so far behind in customer orders.
Doors are in much better shape today, thanks to our significant inventory improvements as a result, we are finally in a position where we can be more prudent with our plant start up expenses.
The same can be said for capital expenses.
Hence focus on getting plants built in lines installed quickly often came at the expense of efficiency.
We are adding an intense focus on adding capacity in the most efficient manner, while maintaining our commitment to speed and quality.
Those efforts will not compromise our ability to grow rapidly will provide added focus on the cost of that growth.
During that we get full value for every dollar we spend and that we time our investments to maximize the impact they can have.
As part of this renewed focus on capital efficiency, you will see US change how we report adjusted EBITDA beginning with Q3, we will no longer add back plant startup expenses for the new store marketing investment that will provide greater clarity on our path towards generating positive net income.
Scales further following our planned capacity additions.
We will provide updated guidance using this new definition at that time, and we will also provide historical data that shows both approaches this will create a seamless transition from the old measure to the new measure to be clear there are no new disclosures and our transparency will remain intact. This is simply providing greater visibility.
<unk> on the cash usage and generation of the business to meet the shifting needs of the marketplace.
While we fully realize that this approach will create much lumpier adjusted gross margin and EBITDA results. We also believe that it will allow us to demonstrate the emerging profitability of that business with greater clarity and more easily compare it to other high growth businesses.
Looking ahead, we are keenly aware that our net sales are running well ahead of the pace needed to deliver our 2025 goal and that the price increases are driving up the buying rate, making that goal much easier to achieve.
We intend to revise our long term goals by year end to capture the impacts of the price inflation, including any impact on our ability to attract new users and.
The loss of users due to higher pricing and the full benefit of higher buying rates.
We will also need to adjust for the updated methodology that Nielsen is using digital determine household penetration that.
That new methodology is now in place and it indicates that we have even more users than we've previously reported about 500000 more users. The new method also indicates that we've been adding users over the past two years at a faster rate than Nielsen previously projected adding an incremental 220000 users over the past two years it was more.
Balanced growth over time.
It included a comparison of the old and new data sources and the Investor presentation. So that you can see those changes.
Before I turn the call over to Heather to discuss the Q2 results and our guidance for the year I also want to make a comment on the planned startup of the <unk> facility and how we think fresh pet will perform in a recession.
We are in the final count down to lift off and N. S. We remain on track to start up our roll line. There next month and produce saleable product by the end of the month.
That will not turn into meaningful shipments until October but it is very exciting to reach this milestone for such a pivotal project.
We have begun sending the highly trained production staff back to Texas from Pennsylvania, and they are ready to go.
All the roll line equipment is installed and we are going through our startup checklist of.
Additionally, much of the equipment for the first bag line has already been installed and we remain very confident that we will be able to start that line up in Q4.
Once that startup happens it will unlock significant potential for fresh pad.
In addition to the significant increase in production capacity. It is designed to be our most cost efficient most sustainable highest quality facility with room to grow and support an even larger business with.
With the first phase of that facility open next year, we will have more than $1 $1 billion in capacity available to us and not the support almost double the volume we have guided to this year.
Ensuring our ability to continue our rapid growth next year and beyond.
We've already spent the cash to create most of that capability and we will finally be able to generate returns on those investments.
Turning to the impact of a potential recession on the business I think it is safe to say that pet food is a category and fresh pad as a brand should perform very well in a recession.
History has shown that pet food is one of the most recession resistant businesses as consumers are unlikely to stop eating their pet and the number of dogs and households has grown consistently through each of the recessions of the past 20 years, while fresh pet was in its infancy. During many of those recessions our track record of growth has been extremely consistent.
Doubling the business at every three years since its founding in 2006.
Further as we have studied the household penetration and buying rate data for fresh pad versus the entire pet food category. During the recent period of rapid price increases we've seen that the fresh pit user base has been more committed to maintaining a fresh bad habit and the pet food category overall.
While this is not the same as weathering a recession. It does speak volumes about the overall loyalty of the fresh pet franchise, even under economic duress.
That leaves us confident that we will be able to continue our rapid rate of growth, even if we experience a recession.
There is also a positive side to recession, we believe their short and not very deep recession could better align supply and demand for the various ingredients and equipment, we by lowering cost shortening lead times and improving availability of the materials suite and dawn.
That could lead to greater capital efficiency and better margins.
In summary, the underlying health of the business is strong and.
And we are more focused than ever on ensuring that the business will generate the margins cash and profitability that you would expect of a company that is leading and defining the future of pet food.
We are navigating some difficult times with a ramp in inflation that the entire industry is facing but we are engaged we are reacting and we are improving and once we find equilibrium with cost and price we will deliver the gross margins that we know this business is capable of delivering.
In combination with the leverage from scale that we get on our G&A costs. We believe we are on track to deliver our 25% adjusted EBITDA goal by 2025.
Now, let me turn it over to Heather to take you through the highlights of the quarter.
Thank you Billy and good afternoon, everyone. We had strong net sales in the quarter in line with our guidance, but the adjusted EBITDA was below our expectation.
A portion of this shortfall was timing of marketing spend and will correct itself by year end.
That was due to the cost of the quality issue, we had in the quarter.
Some of it was due to some logistics challenges we had in June and which we think we can overcome in the back half of the year.
And some of it was due to incremental inflation that exceeded our plan and for which we are taking pricing let.
Let me take you through each element one piece at a time.
Net sales were $146 million in the quarter up 34, 4% versus year end out.
Nielsen measured consumption in the quarter was up 41%.
The difference between Nielsen measured growth rate and the net sales growth rate is the size of the trade inventory, we felt that occurred in the year ago period question as what we did this year.
Consumption growth rate consistent at approximately 21% unit growth and 20 points to pricing growth.
While we still only have about four months of data with full pricing in effect.
This balance between pricing growth and unit growth and in line with our expectations and represent very modest price sensitivity compared to other CPG businesses.
For perspective, our unit growth of 21% in the quarter can be compared to unit growth in Q4 up 19%.
It was prior to the price increases and 28% in Q1, when we had strong distribution and advertising and the smaller of our two price increases within effect.
You should expect that we will always have price growth due to innovation and consumers moving into our higher value items overtime. So our total Nielsen measured sales growth.
Please be a few points higher than our unit growth.
The net sales growth was the rectangle household penetration gain closer to what we would expect over the long haul.
Over the past, while we our household penetration has increased by 19% versus a year ago.
As Billy indicated Nielsen is now reporting that the <unk>.
Size of our consumer franchise is larger than we had previously reported and it is growing more quickly.
Our consumer data and the feedback we get from retailer would support that.
We did see both a downturn in retail foot traffic and household penetration gain in June when gas prices had a national average of $5.
We are seeing a strong bounce back as gas prices are dropping again.
That did have a modest impact on the net sales in Q2 as consumers seem to consolidate our deferred trip in June but our shipments in July have been strong as have consumption and household penetration gains.
It is also interesting to note that the seasonal consumption patterns. We are seeing this year are in line with those we saw in the pre pandemic era with consumption going flat during the summer months due to establish seasonal feeding patterns and then growth resuming in late August .
We expect to see that again this year.
This suggests that consumers have returned to more normalized pre pandemic lifestyle.
You can see this on a three year stacked growth rate chart in the accompanying presentation, which helps smooth the volatility of the last few years and compares our performance to the pre pandemic period.
That shows our growth rate by week, when compared to 2019 is extremely consistent reinforcing the strong and steady growth of the fresh cut business.
We continue to get strong interest from retailers and placing additional fresh breath Bridget.
Our focus and the focus of many retailer has turned towards multi fridge placement and highest volume stores. So that we can both expand the assortment and improve holding power.
Many retailers have been waiting for us to increase our supply before they would place those friendships.
That is now happening, but many retailers are running into either labor issues and budget issues that will prevent some of the more major renovation of their pet food section that are necessary to accommodate the significant increase in space.
They are planning for refreshment.
That will push some of the bigger launches of multi threads that into next year, we will.
Likely come in light on the number of upgrades and second third fridges this year, but will over deliver by quite a bit on the net new stores, because those installations required less labor and can be managed within existing retailer budget.
So it was deferred upgrades and second fridges.
Likely result in a very strong first half of the year next year.
All of this has us feeling very bullish about our prospects at retail over the next 12 months or so.
The adjusted EBITDA was $3 9 million in the quarter below our expectation.
Part of this shortfall is timing with the marketing investment in the quarter coming in at almost $24 million.
This spending was not incremental to the year is.
It's simply reflected a timing adjustment.
We made this investment to help sell through the 12% price increase that went into effect in mid March which is when consumers were most sensitive to the price increase.
Just on the unit movement and household penetration gains that followed.
Pleased with the strategy and the limited price sensitivity that we encountered.
Adjusted gross margin was 42, 4% for the quarter and was 42, 1% for the year to date.
Is up sequentially from the 41, 9% we generated in Q1, but does not reflect the magnitude of the improvement we had expected our price increase.
Even our quality issue.
Ever.
Exclude those call. The adjusted gross margin would have been approximately 43, 8% or about 140 basis points higher.
Mt are affected product that got into the market and has to be retreat was very small.
The cost of the product disposals related to the underlying production issue.
Additional lab work and testing and some supplemental processing was much bigger than anticipated.
We experienced increased inflation and some input costs, mainly due to labor and energy as well as transportation cost increases at our suppliers and expect them to continue for the balance of the year.
Further our cost for diesel and natural gas is well in excess of the cost we estimated when we gave our initial guidance and while diesel has moderated recently it is still well above where it was when we set our budget at the beginning of this year.
Our third price increase which will be two 6% and goes into effect in late September is designed to protect our margins in the face of those higher costs and we expect to end the year with much stronger margins and position ourselves with a much more balanced set of costs and pricing as we enter 2020.
Three.
However, the timing of the increase will create another mismatch between our cost increases and our pricing in the third quarter.
Simple terms.
Cost increases we have seen since we set our budget in the range of approximately $10 million to $11 million or about $15 million on an annualized basis.
Our price increase will cover less than half of that this year, primarily because it wont be effective until the beginning of Q4. We promised you that we would plan more conservatively this year and we did but while we are absorbing some of the incremental call. We cannot absorb all of them. So we are lowering our <unk>.
Adjusted EBITDA guidance to reflect that mismatch.
We are encouraged by some emerging cost trends that suggests that inflation in the materials that most impact that may be moderating.
This may be the result of the economic slowdown we have been hearing about and then early indication of the potential cost benefits you might get if we have a mild recession.
Freight rates have declined over the past few months and we have gotten a rate reduction that begins in the third quarter.
Diesel costs have dropped significantly since peaking in mid June .
While many of our key ingredient and their key input continued to move up the cost of our proteins has stabilized and there was some suggestion that they might actually provide some at least next year versus the costs. We are paying this year.
Your line cost of materials used in construction and equipment, such as steel nickel zinc and copper has also dropped considerably.
While none of these declines will help us in the short term are positive indications that much of the inflation that has plagued us for the past 18 months may have peaked and that will enable us to restore our margin and complete our capacity projects with less pain.
I think it is important to be cautious on it because it only takes one golf hurricane can drive up energy and diesel costs further or not.
Another outbreak of disease to impact the bird box offsetting the otherwise positive momentum we are seeing.
But the underlying supply and demand characteristics are improving so I am optimistic that we will finally be able to reap the margin benefit of our price increases.
Just narrow the gap.
Our production performance in the quarter was strong with increasing throughput during the quarter, which puts us in a much better position on retail availability.
We achieved the highest number of total distribution point in our history during the quarter and have maintained them.
As Billy indicated labor has gone up from being an issue for us to be in a real strength.
We have successfully increased the talent of our rig fleet invested in their training and are now seeing significant reductions in turnover and much higher productivity.
Logistics costs, including warehousing diesel and lane rates rose approximately $2 4 million of incremental costs in the quarter.
This was most pronounced in June when diesel soared to $5 81 and.
And we also incurred higher warehousing costs.
Those needed to segregate the products affected by the quality issue and the cost of starting up our new warehouse in Dallas.
Diesel prices and lane rates have dropped considerably since then and we should return to more normal logistics call in Q3.
Additionally, our inability to start up our inventory allocation tool prevented us from filling trucks as we had intended.
Our natural order fill rates continue to improve our inability to fill trucks completely cost us about a $1 million we.
Back to continue improving our fill rate and hope to have our inventory allocation tool turned on later this year.
We will get the bulk of the benefit as our fill rates continue to improve naturally.
For perspective.
Most recent weeks fill rate was over 80% and growing.
We are continuing to deliver the leverage benefit in SG&A that our plan requires.
Year to date, our SG&A as a percent of net sales has dropped by 150 basis points and we believe it will continue to improve as the year goes along.
Capital spending in the quarter totaled $39 million.
As Billy noted we are expecting this year's total capex spending to be approximately 320 million instead of the 400 million we previously projected.
Delay in the multi fridge expansion less maintenance capex and both efficiencies and timing adjustments on our larger capacity project will free up about $80 million in cash we.
We are also expecting the same delays pushed back some of the Capex previously planned for the next year. So not increase next year's Capex, but will instead pushed the spending back into 2024 or later we.
We can do that and still deliver our capacity infringe expansion plan without the need for additional equity.
Operating cash flow used in the first two quarters was $62 4 million, which was driven by insulated receivables and inventory levels, which were the result of delays in England, invoicing and some inventory reporting challenges and our new ERP system.
I'm pleased to say that we've worked through those issues since the second quarter and.
We are also exhausting the inventory issue, which was caused in part by the need to hold and have a large amount of products due to the quality issue and expect to see a significant improvement in Q3.
That is offset in part by the startup of our second distribution center in Dallas.
We drove $27 million on our borrowing facilities in the quarter.
At the end of the quarter, we had gross availability of $272 million on our credit line.
Jack the various limits.
Looking forward, we continue to believe we are on track for our net sales guidance for the year.
Our net sales are up 38% to date.
Two it was our toughest year on year comparison, but we feel comfortable that we can achieve our net sales guidance for the year.
We're also lowering our adjusted EBITDA guidance to account for the cost of the quality issue and the incremental inflation, we are incurring prior to our increased pricing going into effect.
We are lowering our adjusted EBITDA guidance to greater than $48 million from greater than $55 million.
In closing.
You have undoubtedly heard from us and others. This is a turbulent time, but.
The infrastructure and organizational capability, we have built and the underlying strength of the fresh pet brands have enabled us to continue our rapid growth and we are very optimistic about the future.
While we continue to experience short term hiccup.
We learn from each of them and they become less significant and this makes us stronger as we pursue our long term goals we.
We are motivated by our mission to change the way people nourish their pets forever and we believe we are on track to delivering that goal.
That concludes our overview, we will now be glad to take your questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If.
If you'd like to ask a question you May press star one on your telephone keypad confirmation tone will indicate 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, it may be necessary to pick up your handset before pressing historically.
Any interest of time, if you could please limit yourself to one question and one follow up so we may get to everybody's questions in the queue.
Our first question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.
Thank you good afternoon, everyone I would like to spend a little bit more time on the EBITDA revision for the year and maybe Heather and Billy if you can both talk about this but how much of the burden occurred already in the second quarter versus what do you expect that timing mismatch to account for in the balance of the year. If I just look at.
I think it's on slide eight that EBITDA bridge, just help us break down whats already been resolved and whats still to come and then also related to the Capex just subtle along the same lines.
How much of the deferral has already occurred versus how much is yet to come in terms of the overall provision. Thank you.
Kevin do you want to take that step.
So I'll start with of course the.
On the EBITDA guide so the reduction is approximately $7 million. The quality issue is $2 2 million. So of course, that's already has already occurred in June .
The balance of the.
The change coming from the mismatch of inflation versus price.
And that Hasnt occurred in the first half with the expectation and the balance of that.
In the second half.
I'll take the Capex Park Hill.
Can you just say it one more time to the type of question.
Yeah, just the reverse.
The revision lower in Capex I'm wondering how much of that has already occurred versus how much is yet to occur. So the capex for the quarter or did it come in below mean.
Meaning what's left to be realized is also below or is all of the deferral in.
In the revision of the year in the back half.
Got it yes.
Yes, so a portion about about a quarter of it occurred already in the first half Beth and then the balance is.
Reductions in the second half the main driver of the second half shift is.
The phasing of spend that we'll have around the innovation kitchen.
That's the biggest driver of the shift for the second half.
Okay. So that innovation kitchen is now going to be a 2023 event.
Most of it yes, there'll be a small spend in the second half, but the majority will be in 2023, that's correct.
Okay. Thank you very much.
Thanks Beth.
Our next question comes from the line of Peter Benedict with Robert W. Baird. Please proceed with your question.
Oh, Hey, guys. First question just can you give us a sense of what we should expect plant startup costs.
The launch expenses.
For the full year I think they were.
Around $11 million in the first half what should we think about for the full year and maybe just a sense for what it should look like next year.
Sure So Peter.
Well first of all we'll provide very sharp clarity around me when we issued the revised view for Q3, but for now the best assumption is that the second half is going to be largely in line with the first half so you could sort of double it.
What you have going on there is with it and it start up you have increase in cost as you would expect as we ramp up to start up.
But then.
Of course, then starting up we stopped adding back.
Largely in Q4, and so there is sort of the increased costs offset by.
That costs would have come into the cost structure anyway.
For next year.
We will we will have.
Less startup I mean, we have we have the last line in phase one and it's starting up.
At some point next year again, we will provide a revised phasing of exactly when we plan to start that up but that's the main start up for next year, but you should expect a much less significant startup impact given that and it is really fully operational or is just adding one last line next year.
Got it Okay. That's helpful. And then just maybe I don't know if.
You can help us here, just how youre thinking about.
Kind of EBITDA margin flow through kind of incremental margins on sales growth using this new method and then maybe getting getting past some of the some of the.
The noise that's out there right now in terms of just what's going on in the business is there a way to think about that or for what what is your model I'll tell you in terms of the Incrementals as we continue to kind of grow sales over the next couple of years. Thank you.
Yes, so Peter I mean, I think we said it in the prepared remarks, but certainly there will still be some lumpiness in it so.
We have years of the largest startup like this year.
Just using let's just use primarily in the first half the $12 million as a proxy.
A big impact in plant startup as you look at next year Youre going to get a really nice pick up on the gross margin coming from and it's being started up and running.
Again, just to reinforce our most efficient.
And profitable facility Youre going to get a really nice benefit next year, but then the following and that will flow through on the higher revenue, but then on the following year, we will be starting up things like the innovation kitchen, which will have again 30 that will come with that.
Of course, you don't provide as much visibility and foresight to that.
We move through it a little it will be extremely transparent as we always are but it'll be a little bit lumpier, but the longer term road map and flow through doesn't change.
The expectations are.
And it's as we bring on not only in phase one phase two and three with even greater efficiency continues to be a key driver in terms of the margin improvement and then continued benefits from the SG&A leverage benefits around both logistics and G&A leverage well.
Continue and should continue to be unlucky fifth third part of that restaurant.
Okay, and then maybe if I could just a follow up kind of on price.
You kind of talked about how some of the cost pressures may be peaking here, we'll see if that's the case.
But how do you think about.
Price in an environment, where let's say the costs are starting to moderate and come down do you expect prices will hold in this category.
Or do you think youre rolling back a bit.
Maybe think about that right now.
Scott you want to take that one.
Yeah, Hey, Peter.
So we've been we've been trying to as we've done pricing we've been trying to be really thoughtful as to how this is all going to land eventually.
And it's one of the reasons that it has put us behind.
We'll have quarters, where we've been 30 or 60 days, a little bit slower to take some pricing action because when this is all said and done it's leveled out we want to end up in a really good place.
What we anticipate as many others in the category and just dry and wet food will use significant amounts of promotion dollars to adjust prices both kind of in the near term and in the mid and longer term. We don't do any promotion issue now. So we really don't want to we want to be very careful how our approach to the pricing, where we ended up and making sure that we create a portfolio of.
<unk>.
Really really wide appeal to 11 million plus consumers.
That's kind of how we've been thinking about it.
Okay.
Okay that makes sense. Thanks, so much guys.
Thanks Peter.
Our next question comes from the line of Bill Chappell with Truest. Please proceed with your question.
Thanks, Good afternoon.
Hey, Bill Hey, Bill.
Hey, Bill It's got I guess I know you are.
So waste steep at least in the in the analytics and the customer and and.
I think.
The concern I hear or see most is not your existing consumer base tray.
Trading down because they're highly loyal and obviously they don't want to change what their dog is eating.
But that new consumer trading up and the worry that that will the pace will slow with the higher prices and just that youre at the Super premium as we go into a potential recession. So I guess it does.
Are you seeing anything from that new consumer slowing down.
Except for the small little spikes, where you've seen some unevenness or do you think you can hold up really well.
You talked about growing through past recessions, but youre, obviously, that's much smaller base at that point, so I'm, just trying to any color or any.
Effectively do you have to back that would be great.
Yes, Bill. This is this is a topic we've been spending a lot of time thinking about and watching the data very closely we included in the presentation today, a few slides to give you a little bit.
A bit of a glimpse of what we're seeing we did see a little bit of a slowdown in June when gasoline had five bucks as Heather said in the prepared remarks.
Since then we've seen it bounce back up.
The number that we saw in the last 12 weeks the household penetration gains had been up 19% versus a year ago. When we look at it across a variety of demographics, we looked at it small dog households, watchdog households, both up we looked at it by generation we've seen virtually all the generations are moving up the millennials actually we're moving up the most we're getting.
The most traction in that group and we looked at the cost income groups and cross income groups. We are not seeing any significant differences in their willingness to buy fresh pet or joined the fresh pet franchise, there were a little bit some dips in June I don't want.
To gloss over that June was a little bit lumpier than we would like but it came right back in July so we're feeling pretty good about the ability to attract new users to the franchise because.
Cause the proposition is pretty darn attractive, but that's what our data is saying so far in.
It's in line with what we'd expect to be or would hope to be.
Okay. Thanks, and then.
Just a kind of a minor question I guess, a little surprised that diesel prices kind of.
In fact, you intra quarter I thought you had done some diesel hedges or maybe just educate me on what what is hedged and what is not hedged.
Hedge any diesel, but we do have some hedges on natural gas for a portion of our production facility, but even those will roll off by the end of November So we're going to face that challenge at the end of the year, but we don't hedge we currently don't hedge any of our diesel exposure and that's certainly something as we get a little bit larger in scale in our distribution.
And that we ought to consider but so far we have not.
Okay, great. Thanks.
Our next question comes from the line of Noah Naughton with Jpmorgan. Please proceed with your question.
Hi, good afternoon, Thanks for the call Center.
A quick clarification and then apologies if you said this on the call, but how does your new household penetration target or your metric of $4 9 million compare versus the first quarter of this year.
And then my question is what does the shape of the trajectory look like for a fresh start to get that back on track with its longer term household penetration goal of $11 million.
I believe so.
When you started out with closer to settle claims bricks in 'twenty three wishes.
Sizable 50% jump from where you are today, so I guess the crux of the question as you know, we'll refresh that need to spend more than 12% on AD spending for the next couple of years to catch up so to speak.
Thank you.
Yes.
First of all we provided a comparison in the deck of the June data.
From the old method to the new method. So you can see the difference I don't have the the new method for the period at the end of Q1, so it's hard to say.
But in total it's like 486000 more users in the new method than the old method and the rate of gain over the last couple of years has been 200000 more than what the old method would've shown.
What was most intriguing about the way in which the data has come out and we've also seen a similar piece of data from numerator. So it kind of validated is that our rate of growth has been more in households have been more consistent over the last two years than what they had previously projected.
It gets to your second part of your question is what do we need to do to get to that 11 million households.
Answer is we need to get household penetration growth going back up into the mid Twenty's, which is where we've been in the past and the.
Last 12 weeks are up 19%.
And that includes a little bit of a dip that occurred in June .
So I'm expecting that as we go further towards the end of the year, you're going to see that number continue to go up and we will move into the end of the 20th numerator, which provides similar data with a larger panel is already showing us moving into the low twenty's with their more recent.
Recent data so I'm feeling pretty good about we're moving back up into the 20% plus growth rates and we need to stay there we need to get into the mid <unk> and stay there.
Great.
Got it.
But one of the things you just take into consideration is as the business gets bigger. Obviously this is the simple math is you can do but the 12% it starts to be the dollar start to be tremendous and.
And it allows us to basically drive more and more consumers in.
If we can keep the if we can keep our CAC in a similar range, we should be able to achieve that $11 million number.
Fairly easily.
Understood. Thank you.
Just to clarify though you.
Accelerated some of your AD spending into the second quarter, so presumably therapy very little incremental spending as you move into the back half. So I guess I'm just trying to square how we'll see your household penetration start to accelerate from here you are going to be spending less.
Incremental dollar essence windows data backhaul.
If you remember the comparison to a year ago was pretty soft in this area.
Yes, we have a very healthy Q3 advertising wise and then.
Though he was mentioning we have we typically have a very fairly soft Q4 in advertising.
Look the Big thing is there is there is a tremendous amount of disruption in the marketplace with whether it's gas prices fear of recession I think the fear was may be as bad as the actual recession itself.
We can see consumers stabilizing and their behavior and their traffic into stores.
And it looks like this next period our prices are now stable.
Consumers are kind of calmed down and we're going to see them go back into stores with Fuller fridges than we've ever had.
We anticipate making some progress in this quarter.
Great. Thank you.
Our next question comes from the line of.
Excuse me.
Brian Holland.
With Cowen and company. Please proceed with your question.
Yeah. Thanks, So I have that effect on people good afternoon, everyone.
So if I can.
First about maintaining the net sales guidance.
You know it.
Given prior year track volume compares get tougher in the second half.
Pet specialty appears to be a drag on I appreciate that part of that is comp driven but.
I'm just curious how we get comfortable because it would seem that one or two or both of our.
Attract volume will lead to sequentially get better from here, assuming price dates you get another little bump there in the fourth quarter, but that end.
Pet specialty has got to get better. So can you help us understand the volume path over the balance of the year.
Yeah.
So the way I think about it is we're going to be in this summer.
<unk> period.
Till probably the end of August and then because of the media investment we made because of the better in stock conditions because of the fridge placements that we've done I would expect to see it start ramping up on the consumption as you went through the fourth quarter.
Remember that last year, again, where I hate to go back and talk about lapping last year, but last year, we had a disastrous July because of the warehouse issue that are third party warehouse.
Fortunately survived this year's July and had a very strong strong July and then on top of that if you recall in the fourth quarter of last year, we had the spare parts issue that impacted our ability to ship in the end of in November December and so while we need to see good consumption numbers and I expect to see strong consumption numbers.
Now and the end of the year there are some anomalies in the year ago that kind of gives you a sense that the growth rate on a net sales basis as well as on a consumption basis, where you hold all of the guidance and frankly, it should give us a little bit of room.
And then just as a follow on to that.
You know, obviously trade inventory I think it was maybe like a 700 bps headwind or whatever it was in the quarter forgive me, but looking at the site at this moment, but.
I'm curious if you can help remind us what that looks like in the second half of the year, what youre lapping as far as impact there and then also on the elasticity side.
I appreciate the data that you gave us, but you've also called out some nice.
Distribution growth in the first half so I'm wondering how you discern or how you discern between kind of unit growth that sort of apples to apples and you know what the distribution benefit is because if you had some distributor distribution benefit in the first half it would the logic would be you might have to keep that up to make the math look the same but maybe you can walk.
Through that thank you.
Yeah.
Are we going to get lost in some of your question there, but the best way to neutralize, Brian , which youre talking about is velocity measuring the velocity on the business and the velocity on the businesses continued to do quite nicely, even though we've been in this and this.
Period, where we had $5 gas and whatnot.
I don't know if you've seen that we didn't include it in the deck. This time, we have done in the past the velocity in the business.
Dollars per point of distribution have been been fairly healthy.
So I think yes, we've gotten distribution, where we have more distribution coming in the back half of the year and we're gonna have velocity gains behind the advertising. So I think that all gets us to where we want to get too I don't know if that addresses the question or not though.
No that's helpful.
And exactly what I was getting at I was trying to be confusing, but you've got it trade inventory was the other one there just yet.
Help us understand what.
Yes, there was trade inventory is fairly significant amount of trade inventory refill in the year ago. It was kind of it was kind of odd it was more skewed to the fourth quarter than the third quarter, but even at the end of the fourth quarter. We had some drawdown when we had our supply problems. So it's going to be lumpy throughout the back half of the year. So we do need to have consumption in excess of bar.
Net sales growth to compensate for it.
So theres going to have to be there is going to have to be some over delivery.
But it's not exactly clear how big that number is going to be because the trade inventory needs to grow year on year as well as we get more distribution on the bigger business customers hold three weeks of inventory in three weeks inventory is a bigger number on the 35% larger business than it was a year ago. So there will be some trade inventory build that happens this year as well.
I appreciate it thank you.
Our next question comes from the line of refresh Perique with Oppenheimer. Please proceed with your question.
Good afternoon. Thanks for taking my question. So I just wanted to go back to operating cash flow. So year to date, you guys burned a little over $60 million.
Looks like mainly due to inventory I just wanted to get a sense of how youre thinking about this cash burn by the end of the year on the <unk> level.
Sure.
I think the first thing is the receivables so significantly.
Significantly inflated.
All driven by the.
The growing pains from our new ERP system.
Basically our inability to invoice on time.
Has obviously caused delays in terms of our cash collection. We now as you mentioned already on the call. We now have a solution in place that thought that.
That basically allows us to invoice real time with shipments as we had done previously and so as we collect what was past due and our invoicing on refractory back to our normal DSO run rate of about 25 days based on our customer payment terms. So.
That's the first piece the other piece on working capital.
On the finished goods inventory side.
That is sitting on a days that is largely in line with our objectives to be at around four to five weeks.
Inventory on hand, and we needed to build inventory to improve customer service, but we did have we are sitting on inflated raw materials and packaging inventory in.
In Q2 that was about $5 million worth of an impact and that also was attributable to ERP ground game.
Where we've made it to hold onto some incremental inventory to ensure that from.
From a planning perspective, we have what we need as we work through again.
We have a very dedicated team in place now.
To finish up some of the needed post implementation solutions.
But this should really turn around and what you will see in working capital movement from Hereon will be driven by the growth in the business and not by the European banks.
Okay, Great and then maybe just one additional question just on the guide I'm just curious what you guys see now is a bigger risk for the guide for the remainder of the year.
We think we've refreshed I think we've captured.
Went through and looked at all of the inflation elements because that's the thing that caught us I mean, we are absorbing.
In our guidance some of the conservatism that we built in at the beginning of the year.
That we can't as Heather said absorb all of it.
We've identified and captured all of the inflation that we're going to get but.
There are a few things like diesel and like natural gas that we don't have hedge positions and those things ran wild that could be those could be remaining risks for us not enormous but they could be risks for us.
Side is the same thing that we've had and we keep trying to prevent is any supply interruptions, whether it's upstream for us or it's our ability to produce and supply to our customers.
And I would include in that we need a timely startup of our <unk> facility. We feel very good about where we are we're ready to start it up but we need that roll line to come on to produce the product to deliver our net sales for the year. So I don't want to make it sound like we don't think there are any risks because there are and we have to go out and manage them, but they would come on the supply and not on the demand side of it.
On the supply side and it would come on inflation and Scott are Heather on a PC it any differently.
I don't I think you've covered it Brent.
Yes.
Okay, great. Thank you for all the color.
Yep.
Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.
Yeah, Hey, thanks, everyone afternoon Hum.
Tom I wanted to ask about volumes so.
Seem a little bit slower than at least I would've thought.
Inclusive of more AD spend that you said earlier in the second quarter. If we take a look at just the scanner data. The two year volume CAGR has sequentially decelerated I think each period since call. It late March early early April so I guess I'm curious how that has stacked up versus your expectations you had touched on elasticity.
On the prepared remarks, but I don't think updated.
Actual elasticities. So if you could perhaps talk to that and then how do you think about it not potentially getting worse with the incremental pricing that you talked about today.
Yeah.
We expect that I think as we said in the prepared remarks, we expect to go flat during the summer because it looks like 2019, and that's why we provided the three year stack. So you could see from 2017 to 2019.
We saw very consistently in the summer.
Consumption goes flat, whether it's people on vacation dogs eating less.
You went flat and then he came back up again late August early September and we'd expect to see that continue.
We did see in June we saw some softness really said with about $5 gas.
But we frankly also saw.
Come back in July and saw very very strong shipments in July we saw household penetration bouncing back up so we feel pretty good about about the trajectory for the balance of the year I mean, we're all in unchartered waters, and we don't know whether there's a recession. We don't know if theres a lot next price increase is going to be something that is the straw that breaks the camel's.
Back, but the data we included in the deck and data that we have beyond that shows that pricing is pretty stable at this point.
Also kt, we have is about where it's going to be which is what you'd expect after about four or five months, you would expect to get to a fairly stable place and so we think we know what it looks like and we think we know what the trends look like going forward and our shipments and order rates match up pretty well with.
With the projections and the guidance that we're giving.
Okay.
Maybe just sticking with that thinking about just broader strokes on affordability. So we.
With the new price increase I think youll be up something call. It high teens versus where you were 12 months ago, I guess thats roughly consistent with what we're seeing across the pet.
Pet food dog Cat category.
But to the earlier points about potential for increased promotions coming out of this period of heightened inflation or potentially deflation at some point you don't promote youre not youre not going to do that.
But if others are doing it and they promote back half of it and how do you think about the relative affordability for the product going forward at that point.
Scott you want to take that yeah. So mark so one of the things that we were really conscious about and I touched on this a tiny bit with Peter but not didnt get into the details when we even this last price increase and all along we've made sure that we had a handful of items that were still as affordable for everyone as possible.
We were really conscious about that we did it in a couple of different size and a couple of different product forms. So.
No matter, where the dust settles those products will be available to people and they have seen modest price increases, but they have not bear the brunt, they're not carrying the biggest amount of the price increases. So so anyway. So I think we've tried to be mindful that we put those in place it will be in our six pound chicken roll or some of our 111 and a half pound sizes.
We've tried to make sure that they continue to remain.
Accessible and affordable.
Okay. Thank you.
Okay.
Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Okay.
Hi, Thanks.
I guess I cover a lot of food companies and I don't recall hearing any of them talk about a slowdown in consumption from from $5 gas except for maybe impulse.
So can you be a little more specific as to.
What type of products within your portfolio felt that.
That impact with or are there some items that are more discretionary in your portfolio.
That would make more sense to me than saying that.
People look at the price of gas and then reduce there.
The volume of consumption for their pets.
Yes.
Rob it's the what we saw was foot traffic down.
And what people were doing was consolidating trips and so what we were seeing was people were.
Shop, less frequently and they move to a bigger sizes and so it was I think it was a temporary phenomenon because if you look if we look at our business in July it bounce back in fact that it looks like it's filling a hole, but it might've been created in June .
And I can't I can't put my finger on exactly how that happened and why that happened, but when we look at the data.
On trip frequency.
And the size of the units that they are buying it clearly suggest that people who are consolidating trips and buying larger sizes. When they made the trips, but there was a little drawdown.
Pantry inventory that happened in there, they're making up for it in July again, I don't know, what the psychology that work's behind it but that's what the data shows.
Yes.
Okay, and then maybe one more follow up.
You said that you you increased your media spend in order to sell through price increases.
Is that for the benefit of the trade like you do you increase the media spending to help the trade.
With this price increase or is it for the consumer.
I don't know why.
I'm not sure who it was helping itself through too.
It's to make sure that as Youre seeing your prices rise that you are making sure that you are keeping your your growth rate intact right.
The things that we looked at when we look at growth rate as we're looking at units were looking at pounds et cetera, because dollars or a little bit hard to kind of get a handle around right now.
And we've been able to see unit stay in the high teens, even in same store sales high teens.
The early twenties.
Similar with volume.
So if you look at if you look at it that way through this period of taking a net 17% price increase we've been able to keep our overall kind of velocity growth strong and actually I mean, I look at it and I go that's pretty encouraging, especially with what we saw in the category. If you look at units across the category everyone's kind of.
High Fiving across the pet food category celebrating.
But they are having growth, but if you remove the price increase growth that they have in place units are.
Look pretty bad or volume looks pretty bad for the majority of the category. So I think that we've come out of this in pretty good shape.
Okay, I don't know, if you or Youre, making me more optimistic or less by saying that the pet food category is getting hurt, but okay, Scott, but here's the follow up like you are raising pricing in the back half. So why is this just a pull forward in media once you have to do it again in the past.
So it's literally we called it we literally call kind of Nip and tuck price increase of two 7% is what we're seeing in the <unk>.
On the back of the year, it's literally rounding if we're at $5 79, we're going to $5 99 on items.
I'm just using that as an example.
It was very modest.
One of the lessons that I've I've taken away from this experience is that we would we did one modest price increase than one enormous price increase and then another modest one and the consumer can date could digest more smaller price increases rather than the size of the second price increase which was pretty big because that creates sticker shock.
And could cause the consumer to reconsider or reevaluate do I really need this and then as opposed to more frequent but smaller and.
So the next one I don't think a whole lot of people are going bad and ILS shop, but they they certainly noticed.
Second one.
Okay. Thank you.
Our next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.
Yeah, Hi, thanks for the question.
The first question is Bill you I think you referred to provide you an update.
At some point in the future with respect to addressable households, and the I guess, the underlying algorithms of household penetration and buy rate.
Will you.
Referring too bad as being just kind of a mechanical exercise given the change in.
Approach or methodology by Nielsen or something more fundamental based on price changes.
One kind of consumer behavior or both.
I, it's somewhere in between I don't think we're going to go back and revisit the addressable market. We at least we haven't committed to doing that yet, but we are looking at the drivers. So for example, as Scott mentioned earlier, what is the customer acquisition costs with our current pricing.
You know in the market does that change in any in any appreciable way.
What is the buying rate look like once consumers are digesting the pricing, we've got and just reconstruct the model that gets us from where we are to the 11 million households in the $1 billion to $5 billion in net sales because as I think I said when I framed it up I framed it up and saying we know we are running at a rate that's well in excess of what.
You need to to get to the target and the question now is with the higher pricing and the higher buying rate what is the composition of that going to look like.
Do you make any changes because the CAC is higher or lower the buying rate is higher or lower the households are easier or harder to get and thats. The algorithm, we need to put together and we wanted to see the pricing stabilize before we made that decision.
Okay. So no change to your level of confidence in the one to five.
Or the 25% EBITDA margin, it's just kind of maybe the algorithm underneath that is what you're saying yeah, that's probably the right way to think about it John .
And then I guess just follow up.
I just have a broad question on direct to consumer you didn't really mentioned at least in the prepared comments E. Commerce growth this quarter should give us an update on that and then.
Are you do you have broader plans for a direct to consumer offering.
When might we hear about that if so just wanted to get your perspective on that from a competitive standpoint too. Thanks.
Yes.
So we are continuing to see really nice growth, it's actually in Egypt, we consider e-commerce, which is any place someone can sit down on the computer and order our product.
Some of Thats directly delivered and some of that is click and collect.
It's actually page I believe 45 in <unk>.
<unk> 46 in the deck, John I know, we provide a ton of materials to go through but so that continues to grow.
There's a couple of retailers that are doing a really really great job with us.
We're continuing to invest with them and work with them.
And.
Over time, we recognize that from a DTC standpoint, we don't believe that going direct to consumer is the right path for us, but we do believe that modifying our product portfolio and working with our existing partners is the right path.
And we feel like we've come up with kind of a new and differentiated model that will be really helpful to kind of break into that piece of the market and I think whether it's later this year or Q1 will be we'll be introducing some kind of a new product line.
In order to do that.
Great. Thanks, Thanks, a lot.
Our next question comes from the line of Ben <unk> with Stephens. Please proceed with your question.
Hey, guys insular on for Ben.
Wanted to circle back to the Capex guidance reduction.
If we look at pushing the investments in the innovation center more into 2023.
Given the overall inflation.
Building materials and things that go into setting up the new facility.
Does that $80 million.
Advent into the Capex or somebody that would I would assume that it would be shifted.
Some of that goes into the new year, but it looks like the capex cadence outside of this year. It is still the same 300 201.
So so would that innovation center.
It literally as we were.
We can't get as much.
Two.
From a timing perspective, we actually think that can work to our advantage.
I think we touched on whether it's stainless steel building materials et cetera, saying it feels like with the amount of students that we use in our equipment is pretty extraordinary so as we look at planning that out.
We may have to put deposits down.
At the similar timing, but we anticipate that as the markets on some of those commodities stainless steel for example, or some of the other building materials cooled off a little bit. We think there may be advantage and that innovation center and we're hoping that there's additional savings through that too.
So to be clear that's in the $80 million.
And some of those like for commodities come down.
So that's in there.
80, 80 million is a timing and a little bit of an efficiency as we said we had a conservative set of assumptions, we as we get further along we get more realistic assumptions on both timing and the actual cost and we pushed some of the projects back. It's also you have to know that some of this is the cascading effect, where one project leads to the next project.
And so what Youre seeing is we showed you a capex going out through 2025, but there is some stuff that is just kind of cascading will fall back into 26 in that case so.
The $80 million as a total reduction in the horizon, we're showing you some of it is efficiencies some of it is timing, but some of it is pushed out into the latter years.
Got it so it also I think there's some like a waterfall back.
Yeah, So the 2026.
Some of that incremental spend.
You might think.
Thank you.
Yes.
Yeah.
I had a hard but I think importantly.
But importantly.
You bet.
The capital spending that we have planned out and in this revision gives us plenty of head space to grow and meet the objectives that we have.
Okay perfect.
And then just real quick on I know, you've got a lot of questions on the AD spending.
But just given that there was such a.
Turning to AD support in the first half of the year.
If the economy continues to deteriorate into the back half of the year would you guys feel okay. Turning some of the AD spending back on to support volumes or would that be something that youre more focused on margins in the back half of the year and so you'd rather take the bleeding in wait until the first quarter of next year.
To pick back up.
I think that we're very committed to making sure. We continue delivering on the top line and we feel very good about the plan that we've got there's also lead times on media commitments that would make it hard to do that in an efficient manner. So.
We're pretty committed to delivering the net sales line, we said, but also delivering the EBITDA that we've committed to so I don't want people to get the sense that we would.
Road the profitability because we want we do know as we said in the call. We're very focused on generating cash and cash efficiency as we grow and so we wanted to make sure we're very mindful of.
The investments, we make and when we make them.
Okay, great. Thanks, guys.
Yeah.
There are no further questions in the queue I'd like to hand, the call back over to Mr. <unk> for closing remarks.
Great well. Thank you very much for your interest and your attention I'd like to close close with statement in honor of Olivia Newton, John who passed away earlier today. She said the only way they lift or my dogs to which I would add if she got some fresh that they would be would be lean and the lift easier faster pace. Thank you very much.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.