Q3 2022 Freshpet Inc Earnings Call
[music].
Ladies and gentlemen, greetings and welcome to the fresh, but Inc. Third quarter 2022 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 you your host Jess Sonic from ICR.
Please go ahead.
Thank you good afternoon, and welcome to fresh cuts third quarter 2022 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and <expletive> <unk> interim Chief Financial Officer.
Scott Morris Chief operating Officer will also be available for Q&A.
Before we begin please remember that during the course of this call 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, followed with the SEC and the Companys 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 non-GAAP financial measures, such as EBITDA and adjusted EBITDA among others. While the company believes these non-GAAP financial measures provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance.
With gas.
Please refer to today's press release for how management defines such non-GAAP measures a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures.
Finally, as previously disclosed during the second quarter call beginning with this third quarter of 2022. The company is no longer adding back plant startup and launch expenses in this definition of adjusted EBITDA. The company has provided those costs in a table at the end of its press release to assist in your analysis of the results under both methodologies.
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Additionally, 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 rather it's a summary of the results and guidance they will discuss today.
Additionally, we would ask that your questions remain focused on the performance of the business and the results in the quarter management will not discuss or speculate on other topics beyond what is being reported here today.
With that I would like to turn the call over to Billy Cyr, Chief Executive Officer Julie.
Thank you, Jeff and good afternoon, everyone. The message I would like you to take away from today's call is that we had a solid on plan quarter and that we are taking concrete steps to deliver on the enormous potential of fresh pet by addressing the most critical issues, we outlined in our September organization change announcements.
Those actions include one continuing to drive the strong and consistent topline growth that fresh pad has demonstrated for the past six years, we delivered 41% growth in the latest quarter and are on track for our sixth consecutive year of accelerating growth. We are also well ahead of the pace needed to achieve our 2025 net sales.
<unk> of one point to $5 billion.
Second executing on our operational improvement plan to drive margin expansion in particular, the quality logistics and commodity cost management issues I'll provide more detail on our actions and progress on those in a few minutes.
Third aligning long term growth with prudent capital expenditures our goal is to build a very large and comfortable cash buffer in order to optimize our liquidity and financial flexibility.
Made good progress on this so far we are fully confident that we have adequate resources to meet our growth goals with the cash we have on hand available credit and the cash flow from operations I'll touch on that in more detail in a few minutes as well, but the headline is that we are now projecting that our capex spending over the two year period of 2022 'twenty.
Twenty-three will be reduced by $100 million versus our last projection with no change to our near term growth or our 2025 net sales targets.
Additionally, I want to highlight that we are rapidly building the organizational capability needed to deliver the results we need to.
Today, we announced two important additions to our team first Todd comfort will be joining fresh pet on December one.
These new CFO Tom.
<unk> is a proven public company CFO with experience in high growth food business. He has been the CFO of simply good foods for the past five years and delivered exceptional performance there.
Prior to that he worked in a wide variety of finance roles at Hershey for more than 20 years, we are thrilled to welcome him to our team.
We're also welcoming Dirk Martin to our team as VP of customer service and logistics jerk is coming to us from Lamb Weston, where he managed a large network of third party distribution centers and a complex supply network, both brokered and direct freight in the U S and abroad. In total he has spent more than 20 years in supply chain inventory management.
And logistics roles in a variety of industries and brings much needed expertise to our team Dirk will begin a fresh pet this coming Monday.
Now, let me turn to the results for the quarter I'll start with a few key highlights of our strong topline performance as I said, our net sales growth was 41% in the quarter. This was driven by 37% growth in Nielsen measured consumption and approximately 4% growth from our efforts to replenish trade inventory.
We built market share in all classes of trade and are now the number four brand of dog food in the Nielsen Mega Channel and closing in on number three and number two we're also the number one brand of dog food in grocery despite having only 70% E. C V distribution in that channel.
<unk> velocity I E dollars per point of distribution in grocery is now 50% greater than the second highest velocity dog food brand that makes fresh pet incredibly valuable brand to retailers.
According to scanner data unit growth in the quarter was approximately 18% with the remaining 19 points of consumption growth coming from price increases.
Price sensitivity has stabilized behind the large price increase we took in February at levels that are considered very attractive in the world of packaged goods.
We've just begun to see the third much smaller 2.6% September price increase show up at retail, but have not seen any indications of significant price sensitivity behind that increase and don't expect to see much.
As anticipated household penetration continued to grow now that we're back in stock and media is on the air in the most recent 52 week period of Nielsen household panel data fresh pet household penetration was up 14% and buying rate was up 19%. It will take some time for the rolling 52 week measure to reflect our improved <unk>.
With rates, but we were well on our way it.
It is also interesting to note that the rate of growth amongst heavy and Super heavy users is even stronger suggesting that we are succeeding at converting more households to using fresh pet is the main meal item.
Going forward, we will be transitioning our reporting to data provided by numerator as it provides a larger panel with more in depth demographic information and provides better coverage of all channels, we will reconcile the old reporting in the new reporting when we make that transition.
Now I'd like to turn to the operational plan to drive margin expansion that we've outlined previously with particular focus on logistics commodity cost management and quality.
Let me start with our commodity cost management as a reminder, this issue has been the result of a mismatch between the timing of when we incur increased input costs as compared to when we can pass on those higher costs to our customers and 2022 we estimate that like cost us approximately $19 million.
Given the magnitude of this headwind our entire organization is focused on this and it is an area that we have already taken some action on in the near term, we've gotten closer to our suppliers. So we can better understand the variables driving their cost. So we can better anticipate cost increases. Additionally, we put in place a more rigorous system or tracking underlying.
Cost drivers adjusting the frequency and duration of our supply commitments and are working with our suppliers to find ways to create greater cost certainty that works for them and for us.
We're already in discussion with some potential partners about hedging a wider range of our commodity costs and have locked 75% of our natural gas exposure for next year and are looking at other items such as diesel in total we have contracted for inputs totaling 25% of our costs already and expect to have significantly more committed prior to the beginning of the year the point.
Is that we are seeing headwinds sooner and using that information to take more timely price increases.
As a result, we've now taken a hard look at our anticipated costs for 2023, roughly two months sooner than we have in previous years and have concluded that the basket of input costs will go up in the near term and in response to that work, we've already announced a 5% price increase to go into effect in early February that increase is designed to protect our margins.
And to greatly reduce the impact of any timing mismatch.
On logistics as I mentioned previously, we've just announced the hiring of a new VP of logistics, who has extensive experience with the cold supply chain in the U S and abroad. During his time with Lamb Weston his focus will be to help us more efficiently grow into our expanded distribution network and drive out the elevated cost we have absorbed over the past year.
Additionally, we are making good progress with the startup of our second D C, but do not expect to see the benefits of that until sometime in late Q1, 'twenty twenty-three early Q2.
In the area of quality I don't want to go into too much detail because we view the improvements we make in this area to be highly proprietary and a source of long term competitive advantage, but I can say we are already rolling out one new technology, we developed over the past three years that we believe can make a sizable impact and if two more under.
Development improvements in this area will take time, but will also provide a meaningful extension of our formidable long term competitive moat. In addition, we have very strong candidates under consideration for the new leadership roles in this area.
In Q3, our quality costs I E disposals, and secondary processing costs, both declined versus Q2 disposals cut in half we were off to a good start in Q4, we see this as a big opportunity for both cost improvement and proprietary advantage and our resourcing it as such.
The accompanying presentation contains details on these efforts and a few additional efforts we are undertaking to enhance margins.
In summary, we have a deep appreciation for the importance of rebuilding credibility with you and our team's ability to execute on our operational plan to drive margin expansion will be a primary proof point I want to impress upon you the focus and determination. We have we've made good progress on each of these efforts since we identified them.
In Q3, we have lots of work left to do the path is clear and we are doing that work.
Now we'd like to discuss how we are aligning our net sales growth goals with prudent capital spending to grow capacity, let me start by providing some context, our primary motivation over the past several years was to build as large of a consumer franchise as possible before competition arrived we describe this as a land grab.
And we were determined to get as big as we could as fast as we could and while this is no easy task in a normal operating environment. It was made doubly difficult by the pandemic and the related supply chain and labor issues of the past three years.
Over the past year, however that situation has begun to change well we've continued to increase our scale the latest competitive entry from a leading competitor and with the support of a very large retailer has made little progress we're out selling that competitor seven or eight to one in the stores, where both our brand and errors is distributed this.
Provides another proof point for how significant our competitive advantage is and how much of a head start we have.
Executing a fresh pet food program is extremely difficult we've learned that the hard way at times, but our potential competitors also have to contend with a complex moat that we've created over the past 16 years, which covers the formidable combination of manufacturing Knowhow fridge placement and management fresh food distribution and more.
In that context, and with the successful completion of DNS facility, we are well positioned to balance growth and margins with our increased scale and do so within a prudent financial and investment framework. As a result, we are revising our expansion plans and can smooth, our capex spend to enhance liquidity and financial flexibility while still.
All achieving a robust growth expectations we.
We've already shifted a few projects that we believe we wont need until further down the road, we arent ready to provide the full impact of those decisions yet, but we can say that our expected capex spending this year and in 2023 will be approximately $100 million less than we previously anticipated.
The $30 million Capex reduction in 2022 and $70 million next year.
As noted importantly, we remain confident in our 2025 net sales target, we have the resources and capacity to achieve that target and we believe we are well on track to deliver it.
For perspective within its up and running we will have enough installed capacity to support more than $1 billion in net sales before any of the technology improvements previously mentioned were added investments in capacity.
Finally, before I turn it over to Dirk to provide more detail on the quarter I want to comment on the startup of Rns, Texas kitchen.
We are already producing very high quality roles on a first line well, we will be able to ship those roles. Once we've completed our final validation on the building security and process controls our priority. There is to prevent produce the widest range of best Skus, rather than the maximum volume because that enables us to make full utilization of our Dallas DC.
To date, we have qualified 12, skus and we will continue our projected ramp up which is on track having already shifted to 24 seven production on the roll line for context that is about six months faster than we were able to hit that milestone in kitchens too.
The number of Skus, we have qualified a similarly ahead of the pace. We've delivered on previous startups that is largely due to the extensive planning and training we did it in advance of this startup, including the significant investment we made to train our production team and P E for up to a full year.
The second line and then S. Bag line will begin test runs in January about one to two months later than previously indicated we expected to begin shipping product about one to two months after that.
This added time is designed to ensure that we have completed the optimization of the roles line start up where we have a greater need for the capacity, we have adequate bag capacity of our system to meet the current level of demand. So this delay will not impact our growth.
It will delay the full utilization of the Dallas D. C. Until later in Q1 early Q2.
Once those two lines are operating we believe that we will have enough capacity to fully support our growth for 2023.
Enabling us to provide exceptional service to our customers and consumers and support the aggressive growth plans, we are aiming for in 2023.
We also believe that at scale and this will be our most efficient plant.
DNS facility has the capability to have higher throughput with less labor and longer run times as a result of greater automation, some technology improvements and through enhanced sanitary design <unk>.
Additionally, the onsite chicken processing will offer improvements in quality and cost versus what we experienced in Bethlehem.
In summary, we are seeing evidence that the foundation, we have laid over the past year is paying dividends and will continue to do so in the coming months and years.
We have our largest and most efficient capacity project completed and it will begin shipping product in a week or two that gives us a long runway for growth and margin expansion.
We started up our second D C, which will ultimately shorten the distance our product travels to customers and reduce our freight costs.
We've restored retail conditions and the household penetration growth is on track to support our long term net sales goals. We have proven that fresh pet has the pricing power needed to offset rising costs and still deliver strong growth and will ultimately produce attractive margins we.
We are executing on our multifaceted operational improvement plan to drive margin expansion over time.
We're also taking a more prudent approach to capex and a reduced expected capex spending substantially we are tracking the caliber of talent, we need to address our challenges and support our growth and we have strong support from our customers and consumers.
We are improving the quality of our execution and look forward to demonstrating the cash generation that this business is capable of delivering that is what we're focused on.
Now, let me turn it over to <expletive> for more detailed review of our financials, including a discussion of the change in the reporting method.
<unk>.
Thank you Billy and good afternoon, everyone.
Let me start by outlining the change in our reporting method before I share. The results as we indicated last quarter, we will no longer add back plant start up or launch expenses in determining our adjusted EBITDA.
It is important to note. However that these changes do not reduce the data that we make available.
Our published financial results always quantified all of the elements of the new adjusted EBITDA definition.
We are simply changing the definition of adjusted EBITDA to bring greater focus on our cash generation capability.
Since it's the first quarter the new definitions.
Try to bridge the Badgers for you as we go along.
In that context quarter, three was a solid unplanned quarter.
Net sales grew 41%.
We're now 39% in the year ago for the year to date.
Other than new definition of adjusted EBITDA, Our adjusted EBITDA is three and a half million since we have not added back 8 million of planned startup expenses.
And one and a half a million of launch expense for a total of nine and a half million dollars that we incurred in the quarter.
We incurred a total of just 1.2 million of such costs in the year ago period.
We added 374, new stores in the quarter and are on track to add 1400 stores. This year, while it does not impact our launch expense. We also added 408, new upgrades and three at 182 second third fridges for the year to date.
Adjusted gross margin for the quarter was 34, 5% under the new method.
530 basis points lower than it would have been under the old reporting method.
As you know in quarter, three we had significant preproduction expenses and that is Texas and we will have those again in quarter four as we ramp up production on multiple lines and multiple items.
We experienced significant inflation in cost in the quarter have now taken price increase to cover those costs.
However, we did not take the pricing soon enough to deliver the gross margin, we should expect in a more stable market.
That mismatch cost us approximately $5 million or 340 basis points of adjusted gross margin in quarter three.
As Billy indicated we've already announced another round of pricing to offset the higher costs. We anticipate in 2023, while we anticipate that our chicken prices will be flat to slightly lower next year other costs, including energy packaging and grain based inputs are expected to go up in the near term. So we are proactively taking the pricing now.
Another significant pricing mismatch that price increase will average about 5% and will go into effect with orders on February six 2023.
We continue to drive G&A leverage in the third quarter generating 220 basis points of adjusted SG&A leverage excluding media and logistics. This is consistent with our long term trend in our 2025 goals.
Our logistics costs in the quarter continued at an elevated level as we've been both starting up a second warehouse, where we incur significant cost to move product between warehouses and had been unwinding. Some of the warehouse congestion created by the product quality issues. We had in quarter. Two that situation is now improving quite a bit freight rates have dropped and our fill rates are now running.
In the mid to high 80, so we expect to begin seeing improvement in logistics costs going forward beginning immediately in the fourth quarter.
However, until emphasis producing the full range of both bags and ROE S. Skus, we will incur above average freight costs until we can fully utilize the new Dallas distribution Center.
Which is like to occur in quarter, one of our early quarter two of 2023.
We invested $73 million in capital in the quarter expecting to spend a combined total of 520 million over full year 2022, and 'twenty three.
Year to date, we have spent 168 million of that total.
The performance of our ERP system continues to improve and that has resulted in a reduction in working capital while the inventory levels are still higher than we would ultimately like them all receivables improved by $14 million or approximately 10 days of sale operating cash flow used in the first three quarters was $54 million, we did not draw on our borrowing facility in.
The quarter looking forward. We continue to believe we are on track to meet or exceed our net sales guidance for the year our net.
Net sales were up 39% year to date through quarter, three we have a much tougher compare in quarter four that we hadn't quota three but overall, we feel very good about where we are in that sales.
Similarly, we are reaffirming our previous underlying guidance, but adjusting the guidance to reflect our new accounting method for determining adjusted EBITDA, which now includes the impact of $29 million of startup planning expenses and 4 million of launch expense.
Crafting this $33 million of expense from the 48 million underlying guide you arrive at our new adjusted EBITDA guidance, which reflects the new reporting method of greater than $15 million.
In closing, we remain very optimistic about fresh pets future, we have strong demand significant new capacity and state of the art facility intense focus on improving logistics quality and commodity cost management and strong retailer support. We appreciate the support we've received from our investors and look forward to creating significant shareholder.
In the years ahead.
That concludes our overview, we will now be glad to take your question. As a reminder, please focus your questions on the quarter in the company's operation.
Operator.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
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All participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.
Ladies and gentlemen, we request you to restrict to one question and one follow up.
We will wait for a moment, while we poll for questions.
Our first question comes from the line of Bill Chappell from Truest Securities. Please go ahead.
Hi, Thanks, good afternoon.
Good afternoon.
Oh, sorry, I'm Gonna go opposite of what <expletive> asked but just a simple one of.
Exciting on the new hires and certainly it seems like a solid.
Solid adds but.
How do the conversations go when you're attracting management when there is a actavis shareholder involved in and kind of.
Strategic alternatives thrown out there I mean, how do you get give them comfort and attract additional talent from here.
Bill I E.
Provided an overall comment, but I would prefer not to talk about any issues related to.
Activist investors are what I would say is that we're very happy with the quality of talent, we're getting and then they would be a very good indicator of our ability to continue to attract very high quality talent. So I just I think the proof is in the talent that we've attracted.
Okay I'll leave it at that but second just follow up on the price increase next year.
Yes, what we've been hearing is as retailers have been yeah.
Reluctant, but okay with most pricing taken in 'twenty, two but theres been more and more pushback about pricing, but in 'twenty. Three so have you seen any of that or is there. You know has this been harder to get through than prior ones or any color there would be great.
Got you might take that.
Yeah, Hey, Bill. So we you know I think we've been very open with all the retailers are as we've done all the pricing over time, we would explain to them our strategy and how we're trying to make sure that we're making a handful of skus or it's accessible and approachable to as many consumers as possible whenever.
We wanted to continue to drive the growth that they're looking for and I think they realize and recognize that we have been very constraining and pushing pricing through.
<unk> came in with this one and we explained exactly where it is they were incredibly receptive quite honestly and I think part of it is the extreme consistent improvement in the business and that velocity growth over the year and the authority over the year.
And I think they're also looking at what we've done embracing that and what the rest of the category and embracing and we have been slightly behind what the majority of the categories. So.
I think that he felt it was justified we've had conversations with a lot.
The majority or many of the top retailers and I think they've been very receptive to the conversation and we don't anticipate.
Being a challenge.
Great. Thanks for the color.
Thanks Bill.
Thank you our next.
Our next question comes from the line of annuity Naughton from J P. Morgan. Please go ahead.
Hi, good afternoon.
Yeah.
Hi could you apart.
Our thought process.
The hundred million reduction in the Capex.
Capex outlook.
Project is delayed and how much of 100 million MAU to 125, or so how much capital.
Thank you.
Thanks, Mike Broderick construction cost.
And already we're going to come out with a more detailed look at that when we our current plan is as soon as we get hard onboard and get his feet on the ground a little kind of restate what the long term targets look like in light of all the inflation and the change or the impact that that had.
Well what I can tell you is that we took $30 million out of this year. So the $3 20, we previous outlook would be more like <unk> 90, and we took 70 million out of next year. Some amount of that would push back into the later years, but because we are re looking at all the different projects I wouldn't cast anything in stone.
And in the out years, because we're still doing a fair amount of work on what is exactly the right amount of capacity and we also are working on some new technologies that might have some potential to alter what what capacity, we actually put in so I would take the bank the bank the numbers for the next two years, meaning 2022, and 2023 and we will come back to you probably in early January .
Plans for years beyond that.
Okay, great. Thank you and then for my follow up.
Update us on what the expected timeline it gets installed production at Aneth.
And where do you stand today with staffing and equipment for lines two and three.
Yeah. So we're fully wind one as we said in the call is running 24 seven at this point, we have the staffing already for line two for a 24 seven operation that's all been fully qualified and trained.
And that line is expected as we said in the call to begin running product in January and will be shipping that product within one to two months after that and.
And all of that equipment is installed plus or minus a little piece here or there.
Third line all the equipment exist.
It's all in and its taxes, but it has not yet been installed and we have not hired the staffing for that yet.
Because we really need to see how how the.
Volume unfolds, but knowing we have the equipment. The installation time is obviously a lot less in construction time is and because we already have staffing on the ground. There for two lines with 24 seven operation, it's relatively easy for us to do the staff up because what you do is you spread some of the talent you already have around and you hired the new piece.
On to put some of them on your existing line. So we feel very comfortable we don't have a specific date for that start up with that line, but I think of it as being sometime towards the middle part of the year.
Okay helpful. Thank you.
Thank you.
Our next question comes from the line of Mark Astrachan from Stifel. Please go ahead.
Yes, Thanks and afternoon everyone.
I guess, just just a few questions from my standpoint.
First on the pricing.
Yet regardless of or not.
Fairly commenting on 'twenty three outlook, but in terms of what you've seen so far.
You comment in the presentation about heavy and Super heavy buyers continuing to increase do you see any impact on the recruitment of new households are consumers from the pricing actions.
Do you think that what you've done in terms of eliminating the lower priced items has helped to trial or is not her trial, maybe is a better way to put it and then I've got a follow up please.
Got you want take that Hey, Mark Yeah. So.
We have where we're trying we track it incredibly closely literally like every couple of weeks were really dissecting it.
Where we have seen.
Modest modest impact is in I would say on the lower income groups at this point, but on on our kind of average and higher income groups. There's literally been no no impact that we've been able to see.
Growing penetration among among those groups and I think the main reason is because the category has risen so significantly.
It's kind of like some of the comments as I was mentioning when I was addressing Bill's question, but we we are like if you look at the value of where we are versus where the category is we've actually been at almost a slight advantage.
To some extent and we want to continue to like continue to represent that and show that as we're as we're doing these price increases and keeping things as affordable as we can so we really have not seen any significant impact or slowdown and the other thing is when we're looking at the components of the business and.
The build that we have over the course of the next 12 to 18 months and we look at all those different things stacked up we feel really confident to be able to continue to drive penetration.
I can elaborate on some of that.
At some point if you're interested.
That's great I appreciate that.
Follow up question would be just on the new lines and the thoughts on the lines kind of going for not commenting specifically on the reductions that you outlined.
Outlined in Capex, but maybe just taking a step back how do you think about the ability and opportunity to improve productivity of the lines that you've put in recently and we'll be putting in kind of over the next 12 months from both the ability to produce greater revenues and to do it at a lower cost.
Yeah, Let me take a shot at that and Scott may want to add something but each time, we put in.
New lines, we obviously look for what improvements can we make versus the previous lines.
The facility and at the lines have more automation in the lines in Bethlehem the way I would describe it is if you think about the move from kitchens <unk> kitchens, two is sort of a quantum leap forward for us.
<unk> from kitchens, two two and that is the same magnitude maybe even a slightly bigger magnitude of leap forward in terms of the automation and so we're expecting to be able to have higher throughput per line per hour with less labor than what we have in Bethlehem and we've documented in Bethlehem their kitchens to operate with Cigna.
The higher gross margin than kitchens, one does so we would expect to see a similar kind of improvement or four N S.
At the same time, though we as you know we've been we hired some people starting back in 2019 that we're working on process improvements for us.
And we've got a couple of things that are starting to pan out we're not ready to declare victory nor disclose what they are other than to say that automation isn't the only driver of Oh.
Again for US there are other possible drivers that we can get that will improve efficiency pretty significantly and those things are in varying stages of testing and scaling up.
Got it thank you.
Thank you.
Our next question comes from the line of Brian Holland from Cowen and company. Please go ahead.
Yeah. Thanks, good afternoon.
Forgive me if you addressed this but those startup costs that youre no longer adding back appear to be in aggregate about $10 billion above what was in my model and I guess.
$10 million or so above the first half can you just explain what's behind maybe that uptick perhaps your cup comfort that you've framed it correctly <unk> and when we can expect that to roll off.
Thank you want to take that sure.
The increase in plant startup cost, we had a slight delay in and getting <unk> up and running.
Early on when we put the plan together.
We expected to.
Our September startup and now it's squeezing.
<unk>.
The next couple of weeks.
So a lot of people were hired earlier.
And they trained in in Pennsylvania.
And they are all part of plant start up costs.
So that expense is now.
Behind us for.
Line, one and two.
And in in.
In line.
Well Scott start hiring we haven't hired lines III yet.
We still have more plant startup cost in quarter, four because flying two will be coming up as Billy indicated and you know in the.
Sometime in the first quarter.
So.
At that point in time.
We're running the plan is eventually to have 10 lines sitting in.
In earnest and we will have plant startup cost behind each line and now we're budgeting for it as part of our our GAAP reporting.
I appreciate that color <expletive>.
You know.
Forgive me for peaking ahead to next year, but my model assumed you're spending less than two $5 million of immediate or Q. Yeah. I can appreciate why that might not necessarily impact sales in four Q, but presumably that would weigh on growth at least at <unk> 23.
Is that fair and just help us understand.
To what extent there might be some impact as we as we roll into next year.
Got you want to take that yeah. So Brian historically, we have not been.
Spent anything significant in Q4 from a media standpoint, and we've been able to maintain good momentum.
Knowing through Q4, very often but also right into Q1 now I will tell you we're going to get started in Q1 pretty aggressively right right from the beginning that the best time for us to spend media dollars is early on in the year, we get the best return on that and it helps us carry throughout the year.
We also have I mean, theres a lot of benefits and thing kind of a wind I would say that's carrying us we're gonna have better fill rates, we're going to have a great product innovation, we're going to have really strong distribution. In addition to the media spend and strong creative in addition to some things that we're doing it because he was mentioning on quality I think that with.
All of those aspects together I think that's going to put us in a good spot going into into next year.
Great I'll leave it there thanks.
Thanks, Brian .
Thank you.
Next question comes from the line of Michael Lavery from Piper Sandler. Please go ahead.
Okay.
Thank you good evening.
Over there.
Just curious as you think about Florida, and the hurricane impact there.
It sounds like it was obviously quite manageable but.
Is there any.
He showed the inventory build the trade inventory a little bit of a trade inventory build in the quarter.
Was there much impact from the hurricane obviously, having some homes without electricity and different things but that in.
So how should we think about for Q and pacing your guide implies a little bit of a deceleration is that that reflected or was it more just conservatism maybe just help.
Help us think about the fourth quarter topline.
Yeah, and as bad as as Hurricane Ian was it did not seem to have the magnitude of the impact of the Hurricanes of 2017. So there was some impact but it wasn't wasn't as significant as the 2017 pieces.
We look at volt Q4.
As we said in our comments at the beginning Q4, just has a tougher comp in Q3 does and so that's what we're looking at there was a we had a much.
Much stronger start of Q4 last year and a little bit of a catch up versus the Q3, we had a warehouse issue in the beginning of Q3 last year and so Q4 had a little bit of benefit from that so it's just a more of a tougher comp that we're looking at as we head into Q4 and we're also always remember we took a price increase in September . So we just wanted to see how everything settles throw we have another.
This increase coming in February we just wanted to get a good handle on it but as <expletive> said, we feel very good about where we sit right now for Q4, and frankly are very bullish on where we're going to start the year next year.
Okay. That's helpful and just a follow up on your slide in the presentation about some of the working capital you've got what looks like ERP driven improvement there.
It sounds like you've characterized some of it is needing to catch up to kind of get to a normalized level, but is there more upside in terms of that improving even further just trying to understand how to model. Some of the working capital piece as we think about the balance sheet.
Now I'll have to dig in a second let me just say that we think there's still more room on the receivables and certainly there's a fairly significant amount of room, we believe on the inventory side as well, but <expletive> do you want give them. The details yeah, we're running with $40 million finished goods that we had.
So thats about a week and a half more than would prefer more like this.
Four weeks of inventory versus six weeks.
We also bought a lot of ingredients upfront and the recent approaching department did a great job.
Trying to get a little bit ahead of rising costs. So when you look at our <unk>.
Gradients level and our finished goods.
Together with our packaging materials is kind of a $60 million range.
Our finished goods probably should be about a week and a half less and that as we get up and running and we have two warehouses.
And we are.
<unk>.
<unk> each warehouse.
Our inventory will come down to about $44 five weeks of finished goods. The ingredients. This is really just dependent on how the market looks and what kind of positions we want to take.
Okay. That's helpful. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Robert Moskow from Credit Suisse. Please go ahead.
Hey, thanks.
Okay.
If you have any color for us on what to expect for plant startup expenses next year and is it fair to say that it's going to be pretty constant for a while while you're continuing to build out.
And then I had a quick follow up.
I'll take that.
The plant startup expense this year was related to.
Two lines coming on.
And also the actual plant being built.
So early on we were looking at.
We finished earlier in the year and is now coming in as Bill indicated in the next couple of weeks.
We already have the two lines staffed.
The next slide we haven't hired yet.
But we do have to hire.
90 days in advance so we can train people and get them and get them in house.
But the building on all the expenses associated with the building prior to those.
First two lines coming up have been.
And what's the charge, so you're going to pay for.
All the utilities and everything else associated with the building security in everything and as new lines come up that basis that base has been covered by the two lines and as a third line it towards hence line comes up each each line will have.
Less of a hit as you allocated across the number of lines in place.
Okay, well, maybe I'll follow up on that my second question was.
In the past you've said that it's been very difficult to get your full selection of products into the fridges in stores and have them be.
Filled on a on a consistent basis.
Where do you think you are at in that journey I haven't heard about it lately in and wanted to know.
I heard your fill rates, but I'm not sure about your about your getting that full selection.
Yeah, Let me take a shot at it you'll see in the deck that we attach Theres a chart that shows what our TDP Saar, which is not a specific measure of in stocks, but it's a it's the closest you know.
Measure you can get from the publicly reported data and it shows were at an all time high if you're if you break decompose that into the HCV and average skus in distribution, it's like 15 skus in distribution on at 63% ACB or something like that so it's good but there are still a couple of holes.
That are.
Radically.
Empty that it's just we've got to get the right product produced at the right time and in the right warehouse and Theres just a logistical challenge for us that we've got to work our way through but we're getting better every week and I would hope that once we get these lines up and running and shipping that that problem is invisible, but I would point out that our in stock.
Position today is better than it's been in years and our fill rates today are on par or better than most of our leading competitors in the pet food space.
Okay. Thank you.
Yeah.
Thank you.
Next question comes from the line of Peter Benedict from Baird. Please go ahead.
Hi, guys. Thanks for taking the question first just on the the efforts to enhance margins you talked about fixing some costs for next year can you give us a sense for maybe the visibility you have into it.
Kind of improved profitability next year, just simply based on stuff that I guess falls off from this year you've already locked in that's kind of my first question.
Think of it this way.
Are we talking about this year, having a $19 million gap at the scale that we have in net sales this year.
Which is sort of the timing mismatch, we expect to have a very minimal timing mismatch in 2023, because of the pricing actions and the commodity purchasing management that we're doing today. So you can take a significant portion of that away. You can also take a look at what happened. When we described the issues in logistics, it's costing us 20 <unk>.
With this your scale I.
I'm not going to say that it's all going to go away a all in one fell swoop, but as <expletive> said in our comments our fill rates are consistently getting better we're running in the high eighties and so we're taking away a significant portion of that inefficiency that we had and we would expect that once we get that second DC up and running in Dallas with a full line of items.
Produced locally meaning in Texas.
We ended up cutting the miles pretty significantly so there's a big opportunity there the costs on the quality side. We've got some things that we're rolling out now that we're not ready to describe the benefit of them, but the opportunity pool is the same size as the opportunity pool was on logistics and the commodity mismatch and we think we can make a meaningful dent in it.
Lean more towards the back half of the year, then versus the first half of the year.
Okay. That's helpful. Thanks for that and just curious looks like still you have 2500 locations is coming on this year just curious your conversations with retail partners. How those are going right now what you think the momentum is as you look into next year.
Adding a similar amount.
Or what's what's the view there.
I think we're gonna have a strong.
Back of the year here and I think we're going to have a very good year next year.
Alright fair enough thanks, guys.
[laughter].
Thank you.
Question comes from the line of her patient product.
Open Hi, Mo. Please go ahead.
Good afternoon, and thanks for taking my question. So I just had one question just on your consumption by channel. So big box pet decided pretty significantly sequentially. So just some more color there in terms of what's happening and then how you guys think about the recovery there are the strong potentially stronger growth going forward in that channel.
Yeah. So.
We have never quite smoothed out there's a couple of factors going on we've never quite gotten the supply chain as smooth as we would like we went a little longer and had some additional product shorts.
Then we have had in a couple of other channel.
But I would say that the biggest single factor there has been I would say the channel has been slightly slower.
From a growth standpoint, and a traffic standpoint, and I don't know I'm I'm not.
I don't know the exact dynamics, but I don't know if it was as gas rose people were making fewer trips I mean, we've seen some data around that and I think it maybe had a disproportionate impact on the pet channel. We've seen these things cycle through over time, I think that the work that we're doing and I think the work with the channel is doing overall.
You'll see this kind of move through and get to a more normal balance end and growth in.
And that channel overtime now now the important thing for you to take into consideration is today.
Pet specialty is 14% to 15% of ourselves I have not looked at it in the most recent period, but it's a it's a definitely a smaller piece of business, but obviously, a very very important one that we want to continue to develop.
Okay, Great and then maybe one additional question just just given some of the I guess concerns in Europe , just any update in terms of what youre seeing in the U K market as well.
Yeah, our business in the UK as you know it is very small relative to the U S business, it's more in the exploratory phase.
We are obviously very mindful of the very rapid inflation that exists there and so we are taking pricing there and have taken pricing there will.
We will also see that in our while we don't have a huge cost base there because our product is produced in the U S.
We will have you know wage inflation for the team that we have there as well that's going to have to keep up with the market, but in terms of.
The consumer dynamics, there, so far they've been holding together pretty well.
Haven't seen any significant negative impact on our business trends, but recognize we're a relatively small scale there and you know sort of in the ramp up phase. So I'm not sure we would necessarily see it the way someone who had significantly more scale would see it.
Great. Thank you.
Okay.
Okay.
Thank you.
Our next question comes from the line of Ben.
Ben <unk> from Stephens. Please go ahead.
Hey, guys. Good afternoon, Jim Taylor on for Ben.
Wanted to ask a question on the.
The in stock rates, you know as you guys get the operation side buttoned up.
Does that have a noticeable impact on the velocity with your retail partners and then maybe as like a part to that question do your retail partners have a certain velocity thresholds that they want to hit before they'll put in a second or a third fridge.
Okay.
So.
I'll answer the let me answer the velocity one first so.
10 years ago, we were actually below the average for the category and especially I'm like that sales per linear foot as it very often metric we actually literally go down to the inches. When we look at ours. Our fridge, we are actually typically in the top 20% of the category at this point, where we are.
As the leader in the category from a velocity standpoint, so we've well overcome the velocity hurdle that we had years and years ago, because we have consistent same store sales growth.
So I think that's not that has not really been a challenge so that the other part of your question was like we have not had full fridges for a very long period of time for it's been almost three years since you've had really full fridges with every product in there and we're still we're you know we're still kind of into the we're in the Eighty's at this point, we should typically be we used to.
Years ago.
In class in the high nineties, and that's what we would expect it would be going back to over the course of Q1.
When we see that.
When we're in stock on all of her items every single day, there will be a factor with that.
Being having full fridges, there will be a significant kind of benefit to sales and a real kind of.
Multiplier effect on our on our efforts.
Cross the board so.
It's it's it's probably when you do so I would I would like to do some additional math before putting them out there on that but we have seen it over time that as we have continued to get better bridge fills.
It does help velocity.
I would just add one one point to that which is.
We also have this phenomenon, where one of the items that it's been most frequently shortage is the one where we had the quality issue in the end of Q2 and that has Dustin and the shortage of supply as we've kind of worked our way through all the challenges that come in the wake of that when that is out of stock consumers trade down to our roasted meals item.
When it gets back in stock and they trade back up so we may see the same unit purchase it but we see higher dollars per pound or higher total dollars as a result of getting us fully in stock. So there's a there's a trade up phenomenon that happens for us when we are fully in stock.
And that's one of our shred it or fresh from the kitchen item. So you were referring to.
Got it maybe if I can ask the second.
Second part of the question in a different way do your retail partners have any key metrics that they look at when you're looking to add a second or a third fridge that you're kind of clear before you get the green light.
You know what the single biggest one has been over the past 24 months or even longer it has been.
There's no way when I have half empty fridges that you can ask me to add another fridge.
And I think now that we start to see really strong very consistent progression, which is what we've told them time and time again, what we're going to do as we laid out these plans.
I think that there's real confidence and comfort and adding additional fridges that has been that that has been the single biggest governor on us, adding significant numbers of fridges.
And we're now at a point, where when you start to hit going from the fifties to the 60% to 70% now in the eighties and they literally are seeing these new lines come up and start to operate it gives them great confidence to be able to add additional fridges.
Okay, great and if I could just ask one housekeeping question I apologize if I missed this somewhere in the slide deck.
Our advertising spend in the quarter.
You can see it in the in the decade.
It's imputed in there on the SG&A flight.
What $10 million.
Yeah.
Mindset.
Yep.
Yeah.
Okay.
Yeah.
That's all I had was great.
Great. Thank you.
Thank you our.
Next question is from the line of Jon Andersen from William Blair. Please go ahead.
Thanks, Good afternoon, everybody I wanted to ask.
Hi.
Bill you referenced competition in the prepared comments and I was wondering if you could talk a little bit more broadly about competition you mentioned, the one new entrants I think in the.
[noise] traded space.
In store.
What are you seeing on a direct to consumer basis and as you.
Bring up kind of the new capacity and address some of the capability challenges.
Should we expect.
A kind of a renewed effort in indirect to consumer from from freshmen.
Yeah, So I'll jump in on that John .
So here I think here is the best way for US there are a lot of folks coming into this space and kind of how you want to define it and look at it there's been a lot of folks that have entered.
Retail that have frozen cooked items and some people that have kind of come into fresh.
So if I add all of that together and I think John we've shared a slide once before with you and I just updated it.
All of the competition and all the activity together it looks like a lot, but were still 96% of sales in fresh and frozen cooked foods. So we are where we're by far like the.
Enormous piece.
And we've been maintaining share there. So I think we're really proud of the results there.
And look we know over time that there is a real chance that competition continues to make progress.
We think the end state of this category as we've talked before is in the many billions of dollars in the four $5 billion range and we know we're not going to be alone in that but our goal is to have as much share as we possibly can of that $4 billion to $5 billion.
And I love with Gatorade is done after 30 or 40 years.
And I think that would be that would be our target too.
So I think that's one of them on the DTC piece.
We recognize that there is a there is a really interesting market. There are a group of consumers now it is a small group, but it's an important and high value group of consumers that really appreciate not only customize but also very convenient meals that are coming to their homes for their dogs.
We are we continue to evaluate that and look look at ways that we can make our product even more customized more convenient and I think we'll we'll continue to update people over time I don't think we're quite ready to share exactly what we're what we're looking at but I think we have a.
Our solution that utilizes our best assets and capabilities to give a consumer a great proposition.
Okay, and just a follow up.
I think in reference to the 2025 plan.
In the prepared comments.
It was mentioned that there you have a lot of confidence in the sales.
Target for 2025, but I didn't hear I don't think I may have missed it any any reaffirmation of kind of an EBITDA margin.
Our target.
Any thoughts or willingness to update that thanks.
Well, John we're trying to say was we freely recognize that.
Because of all the inflation that we've had in the past year.
And the impact that has had on buying rate potential impacts on household penetration of our customer acquisition costs and then also on our margin structure. We didn't really want to address the net sales EBITDA margin in 2025 will come back and do that in January kind of level set from what we see at that point.
Well, we didn't want people to think that the change in the Capex spending we were doing was going to in any way impact our ability to get to that number and so that's what we're trying to say is we're just trying to make sure people understood that capex changes are not going to impact our ability to get to the 1.25 billion.
Okay. That's helpful. Thanks, Thanks, a lot.
Okay.
Thank you.
Our next question comes from the line of 40 Ross from UBS. Please go ahead.
Good evening, Thank you for taking our questions.
Just wanted to focus a little bit on gross margin here, you've called out inflation and quality issue as two of the leading headwinds to gross margin in the quarter can you quantify the impact on the quarter and when do you expect the quality issue too little to no longer be a headwind.
Thank you want to take a shot at that.
Sure.
We've never broken out quality.
Before.
But we certainly suffered consequences from a margin standpoint, not only for the quarter, but year to date, we did disclose I think in the last quarter.
$3 $5 million.
Four.
From one of our roll issues.
And we're working on improving that.
The quality as Barry described earlier, we have some.
The study is going on and we feel good about how theyre going to impact the latter part of 2023.
So.
I am not so sure I really want to break that out at this point in time.
Yeah.
I wouldn't break it out and just to add to what they say, we're pretty comfortable that the impacts on quality, which you know as youre growing at our rate and we are the pioneers in this space, we will find issues before anybody else will because you know that.
Added scale things that happened at a smaller chance of happening will show up at some point.
Our challenge is to minimize the size of the impact whenever ever if something does show up that we had not properly anticipated. So that means make it last less time impact less product result in less disposals.
Our goals are very robust and we feel very good about that the focus is on making the bag products as robust as they can be.
Yeah.
For that and then just switching gears a little bit to fill rates here you mentioned fill rates are in the high eighties right now what are your biggest challenges today and when do you anticipate bill rates gone back to normal levels I think I might have heard of <unk> 23 is that correct.
Yeah, the biggest impact on fill rates.
In the like literally in the immediate moment is just getting caught up on our fresh from the kitchen product, which is where we had the product quality issue earlier. This year, it's taken a while to kind of sort our way through that and get caught up.
We are starting to make fairly significant progress on that so I see that closing in may even close by the end of this year, but as we've said all along rolls capacity has gotten tight and we needed DNS line to come on in order to ensure that we can keep up with the demand on a roll side. So as long as Dennis production goes at the rate at which we're hoping it will.
Go we should be able to fill any of those holes that will have on the walls and as Scott said earlier I feel pretty good about our total capacity position as we head into Q1, I mean, it should get progressively better from where we are now in the mid to upper eighties, but.
But as our standard or oracle or market to be well above 95%. We think we'll be there in Q1.
Great. Thank you for that I'll pass it along.
Yeah. Thanks.
Thank you.
Next question comes from the line of Peter Galbo from Bank of America. Please go ahead.
Hey, guys. Good evening, thanks for taking the questions I'll be pretty quick.
Billy I, just I, just kind of want to clarify the timeline, you know with with Todd and Dirk stepping in later this year it seems like maybe you're thinking about.
Reassessing and presenting something to us in January but I just wasn't sure if with them coming on it is that really enough time.
SASSA reassess if plans need to be adjusted or is there maybe a more extended timeline once they come in to reevaluate.
Yeah.
It's a good question.
Our current target is to do it sometime in January ICR would be a logical place for us to do it but we aren't going to do it if we're not ready.
Having said that the work has already started.
And it's well along at this point on all the pieces that we need to put together because the rest of the team has been working on this for some time, but.
But we do want to make sure that the new talent has a chance to get in.
Kick the tires and fully vetted.
Dark start saw this coming Monday, so he'll get his arms.
Around the work pretty quickly one of the things I would point out about these two new hires is in both cases theyre ready to go on day. One this is not a new industry. It's not a rule that they havent played before they know most of the key players involved in the industry. So theyre going to hit the ground running from day, one and we feel very good about it Todd starts in December one.
That doesn't mean, we won't be feeding them lots of information between now and December one so that he is fully up to speed and ready to go on on December 1st So I feel I feel like we're giving ourselves room, but we will not come out with something unless they've had a chance to wrap their arms around the sections that they have responsibility for and feel good about what they're communicating because we want them to make the scene.
All the commitments that we make.
Okay. No. That's helpful. Thanks, and then <expletive> if I could just ask two two really quick clarifying question. I think you mentioned the prepared remarks that gross margins were roughly $5 million.
Under what you would've thought I think that was a price cost comment that maybe would catch up in <unk> I just wanted to clarify that.
Lower Capex spend that you guys are talking about for this year and next year, obviously some of the projects, but is there any impact just on cooler placements as a result of that lower capex or is it solely kind of on production side. Thanks very much.
Yes.
Production sites not on coolers that in the margin. We said we had a two 6% price increase effective the first week of September but by the time it chips, so little impact the $2, 6% will pick up for the whole fourth quarter.
Yes.
About 130 basis points against fourth quarter sales, which is part of it and we do have.
Some.
Commodities that have moved.
In our direction. So we feel that the margin the margin improvement in the fourth quarter with.
She should pick up nicely.
I just am I correct in thinking that the fight you were like 5 million behind price cost, though in the third quarter or is that what you had said earlier.
Yeah, and if you think about it.
The two 6%.
Impacted along with some.
One time issues and disposals and in quality.
Got it thanks very much.
Thank you.
Our next question comes from the line of Cano Rattigan from consumer Edge Research. Please go ahead.
Good evening guys. Thanks for the question just one for me. So I was hoping to touch on the trip consolidation in pack mix issue that popped up last quarter.
The data we've seen it appears some of that may still be going on despite meaningfully lower gas prices versus last quarter.
And any improvement or I suppose a return a return to normalcy on that with the consumer returned to their typical shopping habits and smaller pack sizes.
Thank.
Scott you can take that.
Sure sorry, I missed I missed a bit of it somewhere in there.
It's about it was about.
Focused on pack sizes and return it back sizes.
Cause that right, yes, that's correct.
Okay.
About foot traffic and people pack sizes as a result of that.
Yeah. So.
There has been a it's really been interesting to watch there is a pretty amazing dynamic going on in the category.
Where people have been so here's what we've been seeing in the category, we're definitely seeing where people are trying to stretch things a little further.
As much as possible.
They are there had been some pack size changes. There's also been some trade down from one item to another item within a brand.
We have really weathered this quite well I mean, I mean, amazingly well and I think it's given us increased confidence of what the portfolio is capable of and I think it's given us really strong competence in doing the pricing.
Next year I'm not saying this is a we can be we can we don't need to be really diligent and thoughtful about it but we we really have not seen the impact in the rest of the category and we consistently look at growth rates.
And.
Not only in dollars, but also on pounds equivalent units.
It et cetera and.
It just gives us I guess really good confidence going into the changes, we're making with the other components, we have helping the business continue to progress forward.
Yeah.
Okay.
Yeah.
Thank you.
Our next question comes from the line of John Lawrence from Benchmark. Please go ahead.
Yeah, Thanks, Hi, guys.
Okay.
Yeah.
Billy would you comment just a minute on the decision today on the Capex am I reading it right that.
As you look at the margin improvement.
Plan as you go towards 25 does this a while pushing out some of those projects a little bit well that allow that mark just to expand a little bit.
Or are you maybe in 'twenty three 'twenty four without the dilution from the projects is that fair.
We're going to go into the detail on the projects.
When we roll out the longer term plan, but part of what we figured out how to do it takes some of the innovation projects that we're working on and we found a more efficient way to produce something that requires us to spend less capex upfront and to the extent that that has an impact on margin that would flow through.
But I would say that the margin piece and the capex, while they're obviously related when we were not using adjusted gross margin.
But on an adjusted gross margin basis, where we don't include depreciation I don't think there'll be a whole lot of connection <expletive> would be the expert on that.
I think though that when you're gonna see going forward is the more of our volume that we can have loaded into the facility.
More margin improvement you see on the total business and so as we look at how we lay out the Capex plan and resources. Our bias is to put as much volume in that facility as we possibly can because it has the advantage facility from a margin perspective, and our capital spending plans will mirror of that.
Oh, yes.
Yes.
On a GAAP basis.
Depreciation on that $100 million, assuming it was completed.
By the end of 'twenty four.
It would've hit 25% now.
Pushing that out.
It does help on a GAAP basis, but not on an adjusted gross profit basis.
Great. Thanks, guys. Good luck.
Thank you.
Thank you our.
Our next question comes from the line of Corey Grady from Jefferies. Please go ahead.
Hey, Thanks for taking my questions I just want to ask two quick follow ups first on pricing do.
It's interesting I was let me just looking at promotion and I was I was waiting for promotion to start getting more aggressive it really hasn't moved at all come back to it actually it looks like it might have contracted a tiny bit across the industry and again.
When I'm looking at that I'm looking at wet and also in dry foods. So it's not a direct competitor obviously, but they are calories in the category. So what we haven't seen we haven't seen that action.
Go come out yet when we do take our next price increase we will still be below what most of I would say the wet part of the category has taken and will be in line or a bit above some of the dry.
There and there was a pretty big range by manufacturer on what the pricing has been from what we've been able to see we were just looking at retail prices, but there's some been some pretty dramatic moves on a lot of brands here. So I would say, we will still be will be below wet even when we take this price increase and then in line.
Or slightly above a couple of the drive brands, but.
In a good spot really in a good spot overall.
Got it that's helpful. And then just wanted to follow up so the update on your heavy and Super heavy users you've talked about 25% of fresh pack customers using fresh cut a whole meal replacement in the past can you give us an update on what percent of your customers use fresh pad.
Oh replacement.
I have not believe it may have been in one of those decks I do not remember.
I may be able to find it but I do not have it off top my head quite honestly its something that we have the most right.
Okay.
When you reported on a sales basis, so what percentage of our sales are from people who are doing that it's north of 50%, but when you look at it as a percentage of the of the universe, it's a much smaller percentage.
Got it thank you.
Yeah.
Thank you Larry.
Ladies and gentlemen, we have reached the end of the question and answer session and now I would like to turn the conference over to Mr. Denis Seal from Chief Executive Officer for closing comments.
Thank you very much for your interest and we feel very good about what we delivered and we feel like we just delivered a strong on playing quarter and we look forward to continuing the strength for the balance of the year and I'll leave you with one thought as I always do according to Canadian author and historian Charlotte Gray.
<unk> desires infection more than its thinner.
Almost to which I would add if you feed them fresh pet dinner will win hands down. Thank you very much and we look forward and following up with you later thank you.
Thank you the conference off fresh, but Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
[music].
Uh huh.
Yeah.
[music].