Q4 2022 Freshpet Inc Earnings Call
[music].
Greetings and welcome to the fresh Pat fourth quarter 2022 earnings call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Jeff Sonic with ICR. Thank you you may begin.
Thank you good morning, and welcome to fresh cuts fourth quarter 2022 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Todd confer Chief Financial Officer.
Scott Morris the company's 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.
Part of 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 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.
GAAP.
Please refer to today's press release for how management defines such non-GAAP financial measures.
A reconciliation of the non-GAAP financial measures to the most comparable prepared in accordance with GAAP.
And limitations associated with such non-GAAP measures finally, as previously disclosed during our second quarter. The company is no longer adding back plant startup and launch expenses and this definition of adjusted EBITDA.
The company has provided those costs in a table at the end of the press release to assist in your analysis of the results under both methodologies.
Additionally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call.
Presentation can be found on the company's investor website managements commentary will not specifically walk through the presentation on the call, but 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'd now like to turn the call over to Billy Cyr Chief Executive Officer.
Thank you, Jeff and good morning, everyone. The message I would like you to takeaway from today's call is that our house is getting back in order. After the stumbles we had earlier in 2022. It is not perfect and it will take some time for us to get all the systems and processes working the way, we want them to but the actions we've taken since our early sept.
Remember announcement of organizational changes and a renewed focus on our key costs are beginning to show their potential impact a few of the highlights our first strong net sales growth, we delivered 43% growth in the fourth quarter. This is the strongest quarterly net sales growth since the company went public in 2014.
We finished 2022 with 40% growth for the year, our sixth consecutive year of accelerating growth and also our strongest net sales growth since we went public eight years ago.
Adjusted EBITDA ahead of guidance, we delivered $20 1 million for fiscal year 'twenty, two well ahead of our guidance of greater than 15 million. This was due to a wide range of operational improvements in Q4, including better production and enabled higher revenues improved cost in manufacturing and logistics and lower.
Start up costs and N S.
Third improved logistics performance by the end of the quarter, we were consistently shipping customers, where the fill rate in excess of 90% and that benefit flowed through our P&L logistics cost dropping to nine 4% of net sales in Q4 from 12, 2% in Q3, our in stock position is now at pre pandemic.
For the first time and improving by the day, our fill rates are the best we've had since 2019 and customers are noticing it and adding fridges at an aggressive pace.
Fourth improved quality.
Levels of secondary processing and disposal dropped considerably as we progressed through the quarter due to strong operational improvements that we believe are the result of the investment we've made in training and retention of our workforce either fresh pet Academy.
It typically takes a quarter for quality improvements to flow through to the bottom line. So we were quite pleased to see the rapid sequential improvement in Q4, where we realized a 24% drop in the rate of quality costs as a percent of net sales versus Q3 and that momentum has continued into Q1 of 2023 as well.
Fifth more effective balance between commodities and pricing input cost as a percent of net sales improved versus Q3 2022 due to the September price increase coming in at 33, 6% versus 34, 7% in Q3 and averaged a 35, 9% for the first nine months.
Six we have rebalanced, our capacity expansion plan to drive better capital spending discipline and match our anticipated growth as we indicated at Cagny last week, we adjusted our capacity plan to reduce capital spending between 2020, two and 'twenty twenty-three by $50 million and we will still have adequate capacity to support our plan.
There's some headroom.
Devin the N S startup is going very well our startup expenses came in a bit lower than we had projected because the N. S. Startup is going very well and is ahead of schedule. We are now producing virtually the entire range of roles and at volumes that are in excess of our previous projections. It's allowed us to switch shipments to the state of California to come.
From the Dallas D C. In mid January ahead of our schedule.
We are also schedule ahead of schedule on the startup of the bag line in N S and expect to be shipping a wide variety of skus from that line in Q2, we attribute this performance to the investment in training we made prior to start up and also to the realignment of our engineering resources into a single group as part of the organization changes we made in September .
We believe these improvements position us well for 2023, we're starting the year with well stocked fridges healthy inventories and experienced and well trained production staff robust lineup of new product innovations strong customer commitments for incremental fridges outstanding advertising on the air and pricing in the market that more closely.
That matches our input costs.
It will take some time for all those improvements to align and drive the resulting margin enhancement that we expect but the early indicators are encouraging.
Our plan for 2023 is a logical extension of the updated fresh future five year long term guidance, we outlined last week at Cagny. We continue to believe fresh pet is going to change the way people nurse their pets forever and that will lead to more rapid increases in household penetration penetration. This year than we had last year buying rate will continue.
To grow at a strong rate due in part to higher pricing and consumers continuing to increase the value and quantity of fresh pet items that they buy that.
That will support strong net sales growth, but at a more measured pace that will allow us to address the margin improvement initiatives that are underway.
So with that context, we are initiating 2023 guidance that is in line with our updated long term growth plan, which equates to revenue of approximately $750 million, which would result in growth of about 26%.
In setting that target we were mindful that we are only getting eight and a half points of pricing growth. This year versus the 15 points, we got last year.
We also consider that there is no more trade inventory refill needed and we were lapping a year that had significant trade inventory refill.
While it is hard to put a precise number on the trade inventory refill that happened last year is likely that it was somewhere in the range of $15 million to $20 million.
Finally, we believe we are facing potential recessionary headwinds at a time when we have also taken another price increase we expect that there will be some impact from that on a unit movement and growth rate.
Counterbalancing those headwinds are the significant increases in new fridges are strong investment in media and some of the best New products. We've launched in a long time, and we will do that in an environment, where we're not capacity constrained we have more than enough install capacity such that we can add staffing on about 90 days' notice if necessary.
To meet higher demand.
From an operations perspective, we're expecting to see continued improvement in all areas of our operation, but some of them will take a bit of time some of them will have transitions that AD expense before we actually see the cost benefits for.
For example, we now have more demand than we could supply from the bathroom, <unk> kitchens, and kitchen, south, but not enough to fill both of them and the new lines at N S.
For perspective, the first two lines in N S. It fully staffed would add almost $250 million in capacity, while our guidance implies net sales will grow by about $155 million. This year in other words, while we are adjusting staffing to match the demand we will be carrying incremental overhead cost of the new N S kitchen, while we grow into.
New capacity and achieve higher levels of net sales.
Further we will be shipping bags of product from the peak from P. A to the Dallas D. C. During Q1 and Q2 of this year. This should support shipments in Texas and the West coast until the bag line in N. S is fully capable of producing a wide array of bags we sell.
Those incremental shipping and handling costs are transitory, but will impact us until we've balanced role in bank production in N S.
You can also see steady progress on adjusted gross margin and adjusted EBITDA margin as we move through the year and by the end of the year you should expect to see the fruits of those efforts in the form of much improved capacity utilization and lower freight costs further.
Furthermore, when measured on an annual basis for the full year 2020, 'twenty theory, we expect our results will be significantly better than last year's on several kpis, including adjusted gross margin rate as a percent of sales and adjusted EBITDA margin I will take you through the details.
All of these improvements are enabled by the increasing strength of our operations team and our renewed focus on improving margins, while we still expect to make one or two additions to our operations team. The team. We have is operating at a much higher level and our entire leadership team is relentlessly focused on the leading indicators of performance and have developed action plans to drive the improvements.
We've outlined in our 2027 goals.
As previously indicated we have implemented a 5% price increase effective with the orders beginning on February six twenty-three at this time, we believe that the pricing we've taken adequately covers the known input and energy cost inflation, we've seen we've locked pricing inputs it account for greater than 75% of our cost so far and we'll continue to add to.
Supply agreement agreements as the year goes along.
Due to the timing of our price increase being implemented six weeks into the start of the first quarter. We anticipate that we will have a small price cost mismatch, but on a relative basis to our experience last year, we see this as a as much much more manageable.
Our advertising plan for the year is like in most previous years Frontloaded.
We have greater than 60% of the spending plan for the first half of the year and have been on air since the beginning of January we expect this to Reaccelerate, our household penetration gains taking them from the 16% we had in 2022 to the low to mid Twenty's by the end of 2023.
We're expecting record support from our customers in 2023 at the end of 2022, we had about one 5 million cubic feet, a fridge space at retail and we expect expect that to grow to more than $1 7 million cubic feet by the end of 2023 that.
That represents approximately 200 net new stores. The addition of 3000 in second and third fridges and fridge upgrades and approximately 1000 stores. This is a terrific endorsement of fresh that's value to our retail partners. We believe this will amplify our advertising investment providing added visibility that reinforces our brands distinctive offering.
In total we believe we have all the necessary building blocks in place to generate consistent long term growth that is appropriately geared. So that we can also achieve our margin improvement goals.
We will be able to fully support this growth from our existing kitchens in Bethlehem three lines at kitchen, South in the first two lines in N S with room to spare.
You heard a cagny, we've modified our capital spending plan to better match the rate of sales growth, we are expecting and can reliably support we will continue construction and installation over the next two lines in earnest so that they're ready to go in 'twenty 'twenty four 'twenty 'twenty, four and 'twenty 'twenty five and they are likely needed to support the next leg of our growth each.
Step of the way we are carefully assessing the latest view of demand against our available capacity. So that we keep these two important variables align.
This will help us control expenses, while maximizing our opportunity to drive profitable sales growth.
Want to be clear, however, that our long term economics and the plan for 2023 and assume that we will always have some amount of capacity in excess of our planned net sales because capacity comes on in chunks, it's formed specific ie roles or bags and startups can be challenging. So we want to be sure that we don't get caught without.
Enough capacity as we did for the past three years.
Before I turn it over to Todd I would like to share one additional thought I'm a big fan of identifying key metrics in our business that are leading indicators of performance.
And that's how we arrived at the intense focus we have on household penetration is the prime indicator of our net sales potential instead of store count in 2017 that has proven to be a very reliable indicator of our growth and upside potential and it has also driven the right kinds of investment choices that have resulted in six consecutive years of accelerating growth.
When it came to improving our operations, we struggled to find that critical leading indicator. There were so many that seem to be good indicators of parts of our operations, but nothing that could be a harvesting or a broad based operations improvement.
But as I've seen our performance improve over the last 90 to 120 days there seem to be one factor that underpinned our improving performance on a wide range of metrics.
Employee retention within our hourly workforce there appears to be a strong core of the correlation between the improving retention we've had amongst our hourly workforce and the improvements we are seeing in throughput quality fill rate and many more.
Well that should not be surprising what is surprising is how quickly that impact can show up.
It takes time to build the skills of our team, but relatively little time for those improved skills to pay off once they are in place as.
As we saw a team members climbed the ladder the fresh cut Academy, we've seen are operating performance improving churn.
In this way, we believe that the investment we made in our talent and the fresh Pet Academy is working.
We are attracting more skilled team members, providing them with significant training opportunities and rewarding them with career in compensation gains as a result, our retention has improved dramatically and we've advanced a large number of our team members to higher levels within the fresh cut Academy.
One year ago after more than 15 years of operation. We did not have any team members, who have the skills to be at levels 600, the highest level in our fresh cut Academy. One year. Later, we now have 14 team members at that level. It was highly skilled employees are capable of running virtually any piece of equipment in our operation and demonstrate a level of proficiency.
His proven to result in higher quality less waste and greater throughput.
And N S. We already have 14 members, who have reached level 400 due to the head start we gave them with one year of training in Pennsylvania.
That is clearly contributing to a fast start up and S. We're going to continue focus on enhancing the skills and retention of our hourly workforce and expect to build upon the early gains we have realized since launching the fresh pet Academy those gains are very reassuring and gratifying because we strongly believe that focusing on the people part of pets people planet will pay.
Dividends and in this case it appears that it is happening.
It is also creating sustainable value for our employees their families and the communities in which they live. These employees now have greater skills that will provide value for their entire career and are earning much higher PE with the added benefits of equity ownership every day I hear stories from our production team members about how our investment in their careers is enabling them.
To enhance the lives of their families through to homeownership paying for kids education paying off debts and more we are very proud to have created an ecosystem where their efforts and our training enables so many enhancements to their lives while simultaneously, creating a recipe for sustainable shareholder value creation.
Let me turn it over to Todd for a more detailed look at our results part has been with US since December one, but he has been vigorously working to get up to speed and has taken him very little time to do that he has been a great addition to our team and is evidence that the fresh cut opportunity can attract first right talent and if you prefer this early morning earnings call overall late afternoon and eat.
Marathons, you can thank Todd for that too Todd.
Thank you Billy and good morning, everyone. Let me start by telling you how excited I am to join the fresh pet food.
Been here for three months and I'm, even more convinced than ever that the growth opportunity is very real and that this will become one of the greatest growth stories in CPG.
He will truly transform pet food for the better and create an iconic brand that generates robust profits it has enduring value.
But we clearly have some work in front of us to reach our full potential I have been focused on a few critical priorities in my first 90 days, including the fresh future long term plan that we presented last week at Cagny.
We believe that plan provides a solid roadmap to meaningful profitability, beginning with solid margin gains in 2023.
Clearly believe that we can achieve the goals we have laid out.
And we are hard at work on the efforts needed to deliver them.
As a new CFO you always wonder what you will find when you walk in the door at your next opportunity. Fortunately the fresh pet team gave me some strong results to report and my first call as Bill indicated we comfortably exceeded our guidance on both net sales and adjusted EBITDA.
Let me break it down a bit further.
Net sales came in at $165 5 million up 43% versus a year ago. This was the result of Nielsen Mega channel consumption growth of 33% versus a year ago. The completion of the trade inventory refill we have been working on for most of the past year and a favorable year on year comparison.
By the end of the year, we believe that we have largely completed the trade inventory at retail as our fill rates were consistently running in the mid nineties and our in stock conditions at retail were fairly healthy.
Or FY 'twenty, two we recorded 40% net sales growth with 37% Nielsen Nielsen Mega channel consumption growth and the balance coming from the trade inventory refill that we completed in the year.
Rice increases averaged 15% for the year and contributed to that growth, but it did drive some amount of unit volume erosion. So the entire 15% was not additive to our growth rate.
We finished the year with household penetration gains using numerator data of 16%.
Regarding adjusted gross margin, we continued to experience significant plant startup expenses in our <unk> kitchen in the fourth quarter in the amount of $8 million, but this spend was a bit lighter than we had planned due to.
Due to a smoother startup and Dennis adjusted gross margin was 33% for the quarter, but excluding these start up expenses, our adjusted gross margin would've been 480 basis points better.
For the year adjusted gross margin came in at 36% plant start up expenses in the year were around $26 million and depressed adjusted gross margin by 440 basis points.
Adjusted EBITDA was $18 $8 million in Q4, and 21 million for the year Q4's results benefited from better than projected net sales improvements in quality and logistics costs and lower media spend versus a year ago, which I'll note with plant. We ended the year with median investments at 10.
5% of net sales, which on a dollar basis increased 36% versus a year ago nearly matching our consumption growth.
Logistics costs were nine 4% of net sales in the fourth quarter down significantly from 12, 2% in Q3 due to higher fill rates and efforts to unclog the supply chain.
This improvement in logistics costs brought the total logistics as a percent of net sales for the year down to 10, 7% from 11, 2% in the year ago period, but well above the 8%.
We experienced in the years prior to the pandemic and remains a significant opportunity that we expect to begin to realize in 2023.
Capital spending for the year came in below the most recent expectations at $230 million largely due to timing on some sizable expenses and that's related to completion of the first production building the chicken processing facility in the early stages of construction of phase two.
This is also evidence of renewed cost discipline by our reorganized engineering team and better alignment across the organization on priorities I want to be clear that this reduction in spending does not compromise our ability to grow at rapid rates.
Ample installed capacity for the 25% compound growth rate that we outlined in our 2027 fresh future plan.
As Billy said, we feel we are well positioned heading into 2023, but we also know that we need to demonstrate marked improvement and profitability now the emphasis operating our pricing has caught up to our cost and we have stabilized operations and in both production and the supply chain.
Turning to our guidance for 2023, you'll notice a change in the form of our guidance versus previous years. This reflects a renewed focus on improving margins has the most critical driver of success in 2023.
Our goal is to exceed the adjusted EBITDA target and we will prioritize margin expansion margin expansion over incremental net sales. This does not reflect any less confidence in our ability to drive net sales than in years past, but rather our intention to drive margins as our most important pre.
Already this year, we believe our net sales growth rate is very robust and we fully intend to deliver it.
As such we are guiding to approximately $750 million in net sales for 2023 up 26% versus a year ago.
Net sales growth during the year will likely be less than then the Nielsen measured consumption growth as we progress through the year, because we have completed the trade inventory refill and.
And we will be lapping trade inventory refill in the year ago period and.
In terms of cadence you should expect that Q1 2023 net sales will be comparable to Q4 2022, because we can because we completed the trade inventory refill in Q4.
However, the heavy marketing investment and new fridge placements will drive the underlying household penetration and consumption, which should both rose significantly from Q4 2022.
But the absence of trade inventory refill in Q1 2023 will likely result in Q1 net sales similar to our Q4 2022.
For the year, we expect to see a strong and steady build of consumption throughout the first half of the year. Some flattening in the summer behind traditionally slower summer consumption patterns, and then growth again in the fall, we expect that the cadence of our sequential net sales growth will mirror those trends.
It is also important to remember that we will get the benefit of the 5% price increase with shipments in mid to late February but we'll also lap the larger February 2022 price increase of 12, 5% and the smaller September 2022 price increase of two 7%.
For the year, we expect pricing to average around eight 5% versus a year ago, which compares to the 15 points of pricing that we implemented last year.
Our adjusted EBITDA is expected to be at least $50 million, an improvement of $30 million versus 2022.
Well part of that improvement will come from reduced startup expenses.
That improvement will be partially offset by the higher operating cost of having a large new facility that will not be operating at scale, yet and some transitory expenses as we ramp up the Dallas DC. We will also have higher operating expenses for our ERP system now that we can no longer capitalized in the IND.
Mishel investment in the technology.
In terms of the cadence of the adjusted EBITDA.
It will be back loaded again this year.
We will incur significant plant start up expenses.
Heavy or marketing expense and transitory logistics costs in both Q1, and Q2 and lower volumes against higher fixed overhead and now that we have and its online and need to grow into its scale.
As you consider those moving parts Q1, adjusted EBITDA will be modestly negative due to these expenses and will be the low point for the year Q2, all experienced similar transitory logistics and startup costs, along with elevated marketing investments. So there will only be modest improvement in Q2.
As we move out further in the year, we expect sequential improvement due to increasing scale, the elimination of startup and transitory expenses and growing into our into our marketing investment for.
For context, we expect to generate only modest adjusted EBITDA in the first half of the year.
From an adjusted gross margin perspective, our guidance implies a greater than 200 basis point increase for the full year 2023 logistics costs. Despite the transitory expenses will improve by at least 100 basis points now that our fill rates are up and we will have the Dallas DC operating <unk>.
Advertising will grow it will grow at a rate slightly greater than net sales growth and support restored growth in household penetration the.
The remaining part of SG&A will grow slightly less than net sales growth as the previously mentioned higher ERP costs and lapping below target bonus accruals will be a headwind to corporate expenses in FY2023.
Our capital spending plan for 2023 is around $240 million and for 2000 2024 is around $210 million. This will support the installation of enough capacity to meet $1 1 billion in demand in 2024 and put us on track for enough capacity.
To meet up to $1 4 billion in demand in 2025.
You will note that the combination of the 2022 and 'twenty three capital spending is $50 million less than we projected in November . This is largely due to the timing of the phase II capacity.
And a decision to split that project into two pieces to allow us to ramp up utilization up the first phase of Venice, and also provide more time to qualify new manufacturing technologies that could be significantly more efficient than our current technology.
We believe we have adequate resources to fully fund this plan from our balance sheet line of credit and from cash generated by operations. However, we do expect to refinance or a line of credit this year to better match, our expected growth and capital spending.
In closing we are very bullish about the prospects for fresh pet.
We have significant momentum on both the top line and in our operations, we have adequate capacity to support strong growth.
Our customers are making significant investments of shelf space to support the growing demand.
And our marketing and innovation programs are hitting on all cylinders.
Our operations teams are performing well and with a renewed focus on delivering excellence in quality logistics and manufacturing efficiency.
We are aware of the challenging economic backdrop, and we will constantly monitor any impact that changing conditions may have on our business in order to position ourselves for the best long term return for our investors in short I am glad that I'm here and I think we have a very bright future.
That concludes our overview, we will now be glad to take your questions and as a reminder, please focus your questions on the quarter in the company's operations.
Operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
Pressing this dark kitchens.
In the interest of time, we ask that you each keep to one question and one follow up thank you.
Our first question comes from the line of Peter Benedict with Baird. Please proceed with your question.
Hi, Good morning, guys. Thank you for taking the question a question my first one.
Bill you had mentioned.
Some recession unit impact that's kind of baked into your view for this year I was just wondering maybe you could expand on that talk a little bit about your view on the macro and how you think that.
Or at least if you're seeing any of that yet or what youre seeing now and how you expect that to play out. This year. That's my first question.
I'll just give you a top line on it and Scott can probably provide a little bit more compounding on it but we have work watching the economy, where we're not saying seeing anything specific yet, but you can't be in a spot where you look at the macroeconomic factors that we're seeing whether it's consumer starting to pull back on our end trade down in <unk>.
Variety of other categories not necessarily in our category and think that it's going to be smooth sailing for the balance of the year. So we wanted to be appropriately cautious.
We don't have a specific number that I'm going to give you that would tell you here's what we're worried about which is it's more of a generalized concern I know Scott you want to add to that yeah. I mean look Peter I think what we're seeing is pet food up a lot of it's more than many categories. I think consumers have to get a little bit more comfortable with that new bar that is that the good news is.
The entire category has moved up.
I think that some people have theres been a little bit of trading around and moving back and forth, but it looks like what we're seeing that we really like that's an early early indicators, we consistently seeing pounds move up versus year ago and that that provides kind of really good clarity.
He said under underneath all of that that kind of underpinning. It is these hippos that we started introducing at ICR and I think it was talked about also at Cagny.
Where we're seeing those super heavy heavy or those hippos continue to build and grow and that's going to be the core of our consumer base and those people their pet is their child and they really don't want to cut back on.
On on nutrition, and so I don't think we have any perfect clarity on it but we just want to be prudent and thoughtful about what we're going to see over the course of the year with gaining consumers are we all the early signs look encouraging but we also want to be kind of providing guidance and thoughts for every.
Body.
That we don't have perfect clarity on it.
So why don't I, let him.
Makes sense.
Thank you for that and then I guess, maybe for Todd just curious if you can help us out with.
With with DNA here in the business I mean, you've recast kind of the Capex spend I think this year.
You have about $35 million in DNA, a little less than 6% of sales.
Just curious if you could give us a benchmark for 'twenty three.
And then maybe as we think about it longer term, where it kind of settles out in your five year plan that would be that would be helpful. Thank you.
Yeah, So I'd say for 'twenty three will be it will be in the low 40 million. We don't have a precise number depends really the timing of some one of this some of the equipment gets installed so that number is going to move around.
Quite honestly I don't have a 27 number for DNA.
We'll work on that over time, but at this point I do not have a number of five years out.
Okay, Alright, thank you very much good luck.
Thanks.
Thank you. Our next question comes from the line of annoying with J P. Morgan. Please proceed with your question.
Hi, good morning.
Good morning, Billy you have got a long talked about the strong correlation between media spending and sounds great and then this year. You know again are spending close to 12% of sales for 26% Democrats, but overtime for that percentage to fall.
Got it.
I'm curious if you've seen a change lately and that historical relationship to help get the media leverage here I think again over time.
Any additional color on how you got comfortable with that 90% longer term target. Thank you.
I'll give it a thought and Scott can add to it.
We've seen a little bit of an erosion last year on the media effectiveness, but we attributed most of that to the out of stocks that we were seeing so consumers are seeing the ads, but I couldn't find the product.
And then as you got later in the year as you know we were basically off here in the fourth quarter. So your ability to track that too in concert was was eliminated but over a long period of time. The correlation has remained very very strong and we expect it to continue to remain strong with all the pricing that we've had to take you can also see periods behind every price increase.
There is a debt you know that consumers have a little bit of no shelf shocked that they see the new higher prices they kind of wait out the next purchase or two and then they start coming back to their purchase behavior. So we have to be mindful of that but overall, we continue to believe the advertising is the is the right long term driver in terms of how we got comfortable with the 9% I recall when we were run.
Closer to 12, we were running in growth rates in the mid thirties and higher when we were running closer to 9% of growth rates were in the mid to upper Twenty's. So there's actually a decent history of us demonstrating the kind of long term growth that we've seen at 9% of sales and that's how we got comfortable with that number.
Yeah. So we really we have we basically have plan this year to be slightly more conservative on the productivity of the advertising.
We also know that as we add a lot more fridges and we had good innovation that helps with the productivity. So theres a bunch of these puts and takes that are going on and you've got pricing last year. We had out of stock. This year. We've got a lot of fridges coming in we have really strong innovation and that typically helps with the productivity of advertising, but we also know that the price.
Missing coming in can basically impact that so there's a lot of puts and takes overall I think the key point of your question. We have not seen any significant change in the long term correlation and advertising productivity and sales growth.
Great. Thank you that's really helpful and as a follow up.
Talking about some incremental innovation for the year.
Any color on what we can expect there the cadence that one.
Essentially see some of these new items.
I don't come to market any color there would be great. Thank you.
Yes, so we actually shared a bit and I know we share a lot we shared a bit at ICR, we talked about some products in our vital line called vital benefits we are.
Our expanding our homestyle product line spring in sprout.
Which is kind of our plant based proteins. We think there's an opportunity there over time and also really our leadership positioning there and then probably most significantly for US. This year is what we're talking about from a e-commerce standpoint, and expanding kind of our presence in e-commerce, and our offering there kind of a.
A product that were coming with them and at the end of this very end of this quarter and are in the beginning of.
Next quarter, you'll start to see that kind of come out to the market and we think it'll be.
Everything we've seen testing wise it shows that it's a really kind.
<unk>.
Incremental and differentiated offering and what we have today and we're very enthusiastic and excited to get excited about that.
It's going to be smaller this year, but we think long term it can have a significant a significant contributor to the growth.
Thank you appreciate it.
Thanks Laurie.
Thank you. Our next question comes from line of Brian Holland with Cowen and company. Please proceed with your question.
Yeah. Thanks, Good morning, if I could just tack on to <unk> question about the media investment I'm, just thinking kind of near term here as we contemplate the volume bridge in 2023, which I think assumes about 18%.
Actually you know being on air spending those dollars and seeing the consumer receptivity and then the second part of the volume question would be is there any way you can quantify or contextualize. How you think about the contribution from accelerated distribution and maybe to a lesser extent innovation contribution over the next 12 months.
Well, let me let me take this in a couple of parts.
So the first one is when you're at so in Q4, we really had really no advertising whatsoever, and I think it was probably the most significant period, where we didn't have anything for for that long a time really almost anything for all of Q4. So I mean, the best analogy, Brian is it's a little bit like a flywheel.
And we have seen in the past when we when we have less or very little in Q4. It takes four to six weeks at least to kind of start seeing that flywheel moving and gain momentum.
We're well now we saw a nice kind of pick up over the literally the past couple of weeks and pounds I think I mentioned that earlier, we like that it's a great early indicators it demonstrates that the advertising is directionally.
Directionally working obviously, we need to get some of the dynamics underneath that to work a lot you know a lot harder and a lot better I guess the second part of your question is.
And in a typical year, where we didn't have some of the pricing dynamics in place, we can probably give you a pretty clear.
Uh huh.
Kind of guidance or directional information on how the additional fridges and the innovation would help I think because there are so many puts and takes.
I think we have that perfect clarity right now quite honestly.
I think we've tried to budget it.
It's reflected in our net sales guidance for the year, what we've tried to budget it that way, where we said these are the kind of those puts and takes altogether and there had been lots and lots of work done around it and we put out a number that we feel good about but so I wish I can tell you exactly on the advertising, but I think we have to.
Wait and watch it play through and I think it's going to be a period over the next kind of 60 to 90 days, where we get the second price increase reflects the shelf, where we will start to kind of understand what that impact is.
Typically after that price increase it's a shelf you see a kind of a four week kind of flattening and then you kind of go back onto the kind of trajectory that you would like to.
B and C for the year.
Okay, great. Thanks, and then Todd if I could.
Both near term long term thinking about the balance sheet, just looking at the cadence that.
That you've put together for EBITDA just wondering.
Any updates on credit agreement.
Any risk of the covenant sort of in the near term and do you have flexibility to adjust that as we think about.
That expiring I think around mid year, and then secondly, 1 billion one of Capex.
You know four times 50 million is 200 million of our AR balance sheet capacity. If you go up to four times I know theres some cash on there as well.
So just remind us as we think beyond the next 12 months do.
Do we have more flexibility on the Capex plan if needed.
Or is the assumption that we would have to raise equity at some point. It's just you're thinking you can get through the next 12 months without that.
Yeah, So no issue on the covenants.
In Q4, so we were we were fine.
We'll watch it closely in the first.
Two quarters of the year as you pointed out we're gonna have limited EBITDA for the first half of the year.
I am hoping by the time, we have our next conference call, we'll have a little bit more clarity on where we are from a credit agreement perspective, we're working very hard on that right now as I've said a couple a couple of times they don't.
I am not going to be issuing straight equity here.
And 23 could I do it.
In 'twenty four 'twenty five yeah, maybe if the market conditions are out there and it seems like a wise thing to do I would never take that off the table, but I you know I'm I'm confident we will get something done here.
By mid year, and you know next time around on the call hopefully that'll get that'll be resolved.
Thank you. Our next question comes from the line every person Creek with Oppenheimer. Please proceed with your question.
Good morning, and thanks for taking my question. So I also had a question on advertising just given a number of your competitors have stepped up advertising I think theres also a super Bowl AD out there I was just I was just curious how you guys think about all of that accelerated advertising, how how that's impacting frostbite.
Yes. There is there is definitely a lot of chatter in the market and typically you know its interesting we typically don't see quite as much in Q1, I think historically it.
It feels like there is a lot going on this time of year. What we do know is we have extraordinary advertising that has year after year after year been able to produce the results that we need.
I do think that there is a lot of.
Even if you look at some of the advertising that's out there, including our Super Bowl AD I think it creates incredible awareness around the fresh pet food category I think thats really really good for us.
Think that if you're one of the challenges we continue to have today and will for the foreseeable future as people may know about it but they don't know why it's interest fresh pet food is interesting I think having the leadership position we have across the products that we have the brands. We have the distribution that we have and I would say.
The portfolio of products, a wide portfolio of products and price points that we have I think we're really really well positioned to be a very very clear leader for very very long term. So as theres more advertising in the category I think it brings awareness I think it brings visibility I think it can be helpful for us and we do know that our advertising delivers very very.
Well.
Sure.
Great and then maybe one follow up question for Todd just on working capital just curious if you're if you guys are now past the ERP issues and then if you see any working capital opportunities this year.
Yeah. So we you know we.
I would say we did not end the year in a perfect spot with a much better place than we were at the end of Q3. So it made a lot of improvement.
I think we will continue to improve a bit in 'twenty, four and that working capital as a percentage.
Of our net sales will come down a bit so definitely behind the worst ended in a decent spot and it's still a little bit.
<unk>.
Come this year.
Great. Thank you.
Okay.
Thank you. Our next question comes from the line of Corey Grady with Jefferies. Please proceed with your question.
Hi, Thanks for taking my questions first I wanted to ask about pricing just on your outlook for eight 5% for the year does that include any of the typical mix up in the portfolio that you guys see every year or you know in a recessionary environment.
Would you expect that dynamic deposits.
That's based on entire that's just based on list price changes that doesn't assume any mix change that we usually see a couple of points of positive contribution from from mix and it's usually kind of three to up to five when I see it pause.
I don't think so if I'm kind of maybe not on the high end, but I would think that we'd definitely be into that range from a mix standpoint, and the reason being if you look at the innovation in the portfolio.
Innovation in the portfolio that we have and what we naturally see consumers kind of migrating to some of the better products that are now more available than they've been like our fresh from the kitchen for example.
I think that we could see that dynamic again, even this year.
Because again it goes back to these high these hippo to these high profit that owning households for us.
Heavy households, I think theyre going to exhibit that similar type behavior now it may not be in Q1, but I think over the course of the year I think what we're going to see that dynamic, yes I would.
I would just emphasize and Scott to answer that the availability of our fresh from the kitchen product this year, which is significantly better than where it was last year will give us that benefit we saw some of that in Q4, but as we lap last year's Q1, and Q2, we should see some of that benefit of the migration up the freshman the kitchen.
That's really helpful. Thank you and then my second question I wanted to ask about.
Just the new HIPAA demographic that you're targeting I mean, what are you assuming in terms of cash going forward relative to historical as you target. These customers and then you can take the opportunity to talk about acquiring higher value customers, the lower low level of our media.
Yes.
You think about it today.
We were going to adjust our tax specific to hit those I mean, we probably have some internal metrics, but it's probably not something that we're going to talk about more broadly we'd probably just keep our CAC in a similar range and talk total households over time.
And if we do change it I don't think we're quite ready to kind of share.
You just get into sharing externally that level of detail and complexity quite honestly in the model. So I would keep Tac and kind of the traditional range now again <unk> is not a monthly or in really in reality, not even necessarily a quarter specifically, what we see over the course of the year is where you're going to get the most accurate reads on it.
Say I would really emphasize that because of all the dynamics that are going on in the market right now.
Hopefully that gives you what you need.
Thank you.
Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
Thank you excuse me. Thank you good morning.
Morning.
Just wanted to understand some of the input costs and.
How to think about say chicken for for example, specifically.
Prices have come in a little bit how fixed is that for you is that a benefit should we be thinking about it that way and when the new chicken processing plant comes online.
With your partner at Emmis.
Change how any of the pricing dynamics for your sourcing.
Yeah, so the chicken pricing, we lock the bulk of our chicken for an annual on an annual basis that was done in December and it was assumed in the pricing that we put in the market for February it was slightly below where it had been in a year ago, but not the magnitude that people may have seen as they watch chicken overall the <unk>.
<unk> chicken market ramp up last year, and then drop back down to kind of chicken that we buy didn't go up as much and didn't go down as much.
So there's really not a lot of leverage on the chicken pricing for the balance of this year.
Your comment about the N S chicken processing facility when that facility begins and it begins operating at scale.
The there is an opportunity for a benefit in lower cost chicken first because it's sourced in a different part of the country in chicken pricing can be regional and the second is because of obviously the efficiency of being an onsite facility.
So we're very encouraged and optimistic and that's part of the rationale for having built a chicken processing facility, but we're not ready yet to commit to a forecast of what that magnitude of that improvement will be.
Okay. That's helpful.
Just wanted to follow up on a comment you made about.
Ooh potential technology improvements.
It sounds like or how you think about one of the upcoming lines and.
I guess any more color you could add to that and then at least specifically.
Would that be sort of a different set of equipment or is it something that could be applied retroactively back to some of the other lines as well how could that play out.
Yeah. So I would say, we're constantly working to improve the technology to make fresh Pat you.
You should expect that we're looking for ways to deliver higher quality higher yield a more capital efficient taking up less space and we had some pretty good leads that are taking us down that path and if they do pan out we would certainly try to retrofit anything back into the original facilities as much as possible but.
But at this point, we're just leaving the option open our comments were really focused on leaving the options open.
Because we do have some bill gates.
Thanks, so much.
Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, guys. Thanks for sneaking me in.
Two quick questions well one quick question on why not so quick question first a quick one for me and I apologize Gerry provided this can you give us the details of how you plan to fund the Capex this year.
Yes, so we ended the year about $130 million of cash.
We will generate some cash flow this year. So that that's a good thing probably in the range of $30 million to $35 million of cash flow generated from operations.
We are going to redo the credit facility and in some shape or form so we will leverage some of that as well.
So those are the basic building blocks I'm very confident we'll be able to get that done.
Okay, Okay and sticking on the theme of cash flow you gave us a lot of incremental color at Cagny last week.
I wanted to zoom in a bit on 2027, which seems like it's a bit more reflective of a bit more of a steady state business.
The capex number as you're projecting out there is still pretty lofty close to 9% of sales and you mentioned, a a four term leverage target, which assuming a 6% bar.
Borrowing rate.
<unk> almost 5% of sales for in terms of interest expense.
This leaves you with free cash flow of around four 5% of sales based on that disclosure and thats, assuming a zero tax rate. If we actually normalize the tax rate you end up with a very very low single digit free cash flow in 2027, and I know, it's going to take a time to bleed off those Nols, but I still think it's a reasonably to look look at it.
Is I mean is.
What we're looking at.
Is the goal here five years out like we're still we're just barely generating free cash flow given the capital intensity of this business and at what point in the future do you think it will we ever actually get to like a meaningful inflection where theres better cash generation as a percentage of sales.
Yeah. So look as I said at Cagny are our expectation is we will be free cash flow positive in 'twenty six and then it's going to incrementally improve.
Over over time, you know our expectations are we tried to lay out some some targets from a margin perspective that we thought were very attainable, we talked about some where we felt the upsides were longer term on margins and our you know we feel like those could.
Could come into play over the next several years as well as we just talked about some new technologies. We are working on to reduce capex over time and to produce and to improve profitability. So look.
Is that free cash flow outlook over the next several years look robust not.
Not not a lot, but we have some clear opportunities passed that point to dramatically increase free cash flow.
Okay. Okay. Thank you I'll pass it on.
Thanks, Jason.
Thank you. Our next question comes from the line of Ben <unk> with Stephens Inc. Please proceed with your question.
Hey, guys.
Thanks for taking my question.
Tom I guess first to follow up on Jason's question, there on kind of some of the cash flow timing.
Can you give us an idea.
First half of the year is essentially going to be very modest EBITDA. It can be all back half weighted can you give us an idea for the.
How you guys will draw on the credit facility and what that will look like kind of going into the back half of the year and maybe expected interest rate.
Yes, they'll get a look.
Again, we're in the middle of Redoing that credit agreement, so I'm not going to comment on how that's you know exact couldnt get drawn and what the what the terms are so more to come on that.
Hugh.
My job is to get that done and I'm very very confident we'll we'll be in good shape, you know theres a couple of different alternatives. We have out there again more to come on it again, we ended up we ended with some significant cash at year end, so that that'll that'll keep us going for a while and we're going to watch you know every every penny of Capex as the year goes on.
So I am fully aware of the cash needs of this business in the near term and I'm going to go get it solved.
Okay, Great and then maybe one for you Bob the way and Scott.
Called out stronger trends, among the kind of heavy superheavy households, but it's kind of a broader household demographics.
That driven by just in stocks finally being at a consistent level was there something else at work there.
Polymer results with the Super heavy in the RV households, being kind of at the front of the portfolio.
I don't I don't think it has to do with with in stocks I think those are the people that have sought us out over time and actually be willing to either switch or even change stores.
We have a pretty long term kind of picture of these people. We've had really good consistent growth with them over time and I think what we're recognizing as we mature is that we want to make sure that we want to focus on those more than ever.
They're over 80% of our total total dollars, they're the people that are very very dedicated to this idea.
There's a lot more of them out there and we want to base our business, even more so focusing on those folks.
I don't think it has to do with the more recent in stocks and I think it's you know I guess it could help but I don't think that's really that has not been the dynamic we've seen historically when we have like a five year trend on that.
Okay, great. Thanks, I'll pass it on.
Thanks.
Thank you. Our next question comes from the line of Bill Chappell with <unk> Securities. Please proceed with your question.
Yeah.
Thanks, Good morning.
Good morning.
Just wanted to talk a little bit about kind of the.
What I would say soft landing in the second half I mean, you will have left most of your pricing.
Sizing loves to come back a little bit.
As you move to the second half.
So just trying to understand how volumes pick back up to make US I think you said youre going to have 15 points of price benefit last year, you got nine this year, but it's.
In the first half so.
Is it just a case of <unk>.
Further in Sox and added bridges.
Versus supply constraints last year end and does that give you enough momentum. So that you can as we move into 'twenty four still have kind of this high or in the 20% plus type growth or are there other things that I need to be thinking about.
Yes, Bill I would I would say that you should view this year is a year, where our momentum build so we start with all the pricing that we've taken including the most recent price increase having impacts on the unit volume pound volume and the advertising investment that we've made which is frontloaded again, starting to jumpstart that engine.
Get into growth the fridges are gonna come on they're going to come on at a fairly heavy rate in the first half of the year and we will amplify the value of that advertising are the in stock positions, we start with the new year, a pretty good. So I think it's the advertising is falling on very fertile ground. So we expect to see continued build as you move towards the back half of the year and we'd expect to see how.
<unk> penetration gains in the back half of the year that are much more consistent with our long term trends what youre, saying, we will have from a net sales perspective, we will have to lap the trade inventory refill that we did in the fourth quarter. So you won't necessarily see it all in the net sales, but you will see it in the consumption I don't know if that answers the question or not but that's the that's the way we see it unfolding for this year.
<unk>.
Got it.
Yes.
They tuned the second question just on the competitive landscape there've been some commentary from a competitor that there was not.
I'm not quoting lots of fridge availability at the retail side.
Core other competitors come in and if that's the case and do you I guess, one do you have a lot more opportunity to add Christmas this year and two if that's not the case can you maybe help us understand.
The dynamics there thanks.
Bill as I said at Cagny as I said at Cagny I found that comment as odd as you did.
The reality is we're in 60% ACB today. If this was an easy thing to do we have the highest productivity per linear foot or cubic foot at retail in the pet category and we deliver the best margin. If this was an easy thing for the retailer to do we'd be at 85% ATV today. So I found it really odd that we heard that comment.
But we'll see what their plan is you know as we all know Walmart has invested in fridges not many other people have so I'm not sure what theyre thinking.
Thanks.
Thank you. Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.
Yes, thanks, and good morning, everyone.
Wanted to ask about.
A couple of things related to volumes. So first you talked about media spend being back on air year to date versus <unk>.
Can you talk a bit about how volumes have progressed relative to expectations. If I look at our scanner data volume trends have been largely flat with with <unk>. So how would you expect.
That to progress relative to the advertising spend and related to that or sort of related to that 13% or so new fridge space by by my calculation. How do we think about the productivity of that adding to the sales growth you know layering on your volume assumptions and layering on points of price that you you talked about.
Thanks.
Hey, Mark.
So I I I'm I'm, a little obsessed with it especially during this type of period.
I looked at the pounds weekly.
And you know I'm a prior period Guy right.
All about when I look at the business I could care less about year ago is interesting, but it's all about prior period and are we making progress.
And so I've been watching pounds weekly every single week over the past four or five weeks.
So you almost six weeks, we've made progress in pounds versus if you take a look at Q4, and we should reconcile potentially on the numbers here maybe offline, but when you look at Q4 were up about 6% versus Q4, which is right in line with where we expect it to be from a on a pounds base.
<unk> year to date, what I'd like to be higher absolutely.
And <unk> and we're kind of in that double digit range low double digit, but we are in the double digit range on pounds. So we.
We're kind of tracking with exactly how we would expect so and then the second part of your question was around the fringes. So fridges unquestionably AD availability, but at the end of the day, we're selling dollars and pounds and it helps with the advertising productivity et cetera et cetera.
Now when fridges come on it's great that they come on but again I'm looking versus prior period, we haven't added a whole lot quite yet we've added we've added some kind of quarter to date. The biggest quarter is going to be probably next quarter and from a fridge standpoint, we'll add a lot during that period.
And it will help but when a fridge first goes in the first couple of weeks, it's not doing a whole lot. It takes a few months I think that the number we quoted within six months, assuming about 80% of what that channel typically ends up ends up doing if we add a totally new fridge, we are adding a lot of second fridges here, they take a little bit longer in order to create the lead.
<unk> productivity that we would see on a first fridge for example, so we know that those those definitely add and we have we've done a bottoms up view on what the fridges add over the course of the year with the advertising ads and how kind of how it all works together.
That's kind of how we've gotten to the guidance that we've all gotten comfortable with.
Does that does that give you enough.
Okay, and then just let me add one more point mark because not everybody sees all the data that we see when you add pet and pet historically, I mean, and I mean in much of last year was a very significant drag on the published Nielsen data.
But our on our data not the public data.
But it has had a rebirth lately last four weeks are up 20% versus year ago. So we're starting to see renewed growth in the pet channel that is helping.
Helping pull the total business along so I would just add that piece to it.
That's definitely helpful. Scott to answer your question.
Just related to that you you called that out in the presentation.
Specialty piece it would be expectation would be that that can be used to build relative to.
The number in the fourth quarter and what's driving it is a comparison coming off with the big base from a couple of years ago.
What's going on within that channel.
We've had we've consistently added purchase in the channel which is helpful.
Quite honestly one of the biggest ones as it has been the most disrupted supply chain, we'd probably had.
I mean I.
Just the facts around it so I think that's as we're having.
Other thing is you missed if you Miss a shopping trip and pet.
Youre not coming back there next week you missed a shopping trip and grocery you may have a chance to get a consumer back.
The average average shopping trip for pet specialty, it's like 30, something days, where a grocery store can be twice a week right.
So it just it creates a really tough dynamic to recover from a sales standpoint, now and we.
<unk>.
We were just not in a good spot for a very very long time, and it actually has taken a little bit longer to recover kind of getting in stock and pet. So I think that that's been a part of the dynamic and I think overall.
Again I go back to the advertising that's on our air.
As we know it's incredibly impactful with some of the best advertising we've ever had.
And I think that's going to drive.
All channels over the course of the year.
Got it thank you.
Our next question comes from the line of Cody Ross with UBS. Please proceed with your question.
Good morning, Thank you for taking our questions I just had two quick clarification questions and then one longer term picture question.
First on the mix that you talked about three to five points you usually get a benefit is that in your guidance for this year for sales to grow 26%.
Yes.
Okay, and then secondly on the EBITDA you guided <unk> EBITDA that would be negative for mix and improvement in <unk> and essentially all of the EBITDA for 'twenty three to be generated in the second half does this mean that your cash burn will be greater in the first half as well.
Yeah Yeah.
Yes, it will be greater in the first half than the second half that is a correct statement.
Okay, and then just more longer term you consistently delivered against your topline goals each year as new competitors have come and gone do you think a more formidable competitor in the category would help accelerate growth in the category or would it impede your ability to grow and reach your goals. Thank you.
And what we've seen in other categories is the arrival of another competitor if they do a good job and they spend money obviously increases.
Increases the size of the total category.
And that's that's viewed as a good thing most most leading brands that they continue to execute well end up with a smaller share of a larger market, but the larger business in total.
So we'd have to see what the quality execution has been what you can see from the competitors who come at us in the past is they really haven't been additive to the category and they have ultimately ended up leaving because they just didn't have the velocity to justify the space. They were taking up and it certainly didn't produce the economics that they were expecting so it really depends on what the quality of execution is but I would see.
Just that this is a category is going to grow very fast and more investment is going to make it even bigger faster.
Great. Thanks, I'll pass it on.
Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hard to believe that there are more questions but.
Just a couple of quick ones.
In your 2027 number that Jason was talking about I think you have a $200 million capex number in there.
Is that considered run rate Capex I guess it is.
It isn't isn't it like how much of that is still growth and do you think by 2028, it's a lower capex number and maybe you could help us a little bit on is any of it related to fridges.
I would imagine that would.
Type of spending would continue.
Yeah. So.
Couple of thoughts on it it does include fridges.
I would I would assume over time that the rate of growth in fridges, ultimately will slow down as we get the ACB and and you know multiple fridges.
And many many retail outlets across the country. So we will invest heavily in that area over the next couple of years, but that that will slow down over time.
Capex I would say and as you go five years out will be dependent on a couple of things. One is what is our expectation for our rate of growth when we get into that 'twenty six 'twenty seven timeframe and we're still growing 25% or do we see that coming down a bit and the other the other variable is due technologies.
As we've been discussing so those are the those are the big variables.
Could it be as high as $200 million on a run rate.
It could if were grown.
Extraordinary rate, but I think that's a TBD at this point.
Well then I guess the question is is it possible to break out the 200 in terms of maintenance versus growth.
So I mean, the fridges, we tend to spend right now about $25 million to $30 million a year and then we you know we have nominal maintenance on the plants. So the vast majority of what we're spending on capital today I would say you know 75% 80% of it.
Is growth and new capacity.
Great that's what I needed. Thank you.
Thanks, Rob.
Thank you. Our final question. This morning comes from the line of Jon Andersen with William Blair. Please proceed with your question.
Hi, Thanks for squeezing me in two quick ones I wanted to ask about <unk>. If you can talk a little bit about the ramp of blind one rolls line versus your internal plan productivity et cetera, and then does that signal depending on how that's going and we believe it has gone well right does that signal well for line two whereas the line two effort really.
Unique different distinct given that it will be focused on bags. What are some of the key milestones we should be looking for youre looking for around the development of that second line.
Yeah John .
The roles line is going well, it's ramping up at a pace that is in line with our expectations, maybe slightly ahead of our expectations at this point producing the full range of Skus and in reasonable quantities of volume.
They are separate efforts, although if you can avoid having a distraction from the first line to focus your energy on the second line. It certainly helps you get the second line up and running more quickly and more reliably I can tell you that as I said on the on the comments that the second line is doing well, we're well along in the commissioning part of that price.
And we'd expect it to bring in that lineup.
Fairly quickly.
To recognize though that the that line has to produce a fairly wide range of skus everything from our roasted meals to our multi protein to our small dog to our freshman that kitchen products. So it'll take a little bit longer to qualify every one of the items on that line. So we the outlook is that we would have salable product at the end of this quarter, the beginning of next quarter, where well.
On track with that we said we'd have the full lineup qualified by about the end of the second quarter, we feel like we're on track for that and once all that happens then that facility in N. S will be producing the vast majority of our lineup and we'll be able to get all the the freight efficiencies out of the Dallas DC.
Okay. Thanks.
And then <unk>.
Highlighted ecommerce.
It's kind of an innovation begin to reach an opportunity.
I guess, what I'm curious is what's different about this DTC approach versus.
What what your customers can do today, which is click and collect or.
Procure fresh pet through last mile delivery how is this different.
And value added incremental relative to the kind of the current go to market approach. Thank you.
Yeah.
Hey, John .
It's actually a product that will be much more specific or accustomed to a specific.
Consumer and dogs needs. So it's that.
It will be someone could find some of the attributes within our line, but this would be very very specific and kind of almost a custom.
Customized solution custom feeding plan for that specific dog and their attributes so.
<unk> level body body type.
Any kind of elements issues. They may have sensitivities. They may have et cetera. So it would be very custom and it'll be incredibly convenient for consumers also so we do think it's definitely incremental and it seen seen as incremental by consumers and all the testing that we've done.
And is this something that debt.
The consumer will interact with through through your website.
In order to get that customization.
No we will be working with with our customers.
Due to execute this we think that this is a we think it's the best and smartest cleanest most cost effective and environmentally friendly way in order to execute the launch.
Thanks, so much.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. <unk> for any final comments.
Great. Thank you everyone for your interest and I would leave you with one thought according to the Nobel Prize, winning author Orhan Pamuk dogs do speak, but only to those who know how to listen to which I would add if there are anything like my dog, they're asking for more fresh pet thanks, everyone and we appreciate your interest.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.