Q1 2023 Freshpet Inc Earnings Call
Greetings and welcome to fresh Pet's first quarter 2023 earnings call and webcast.
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A question and answer session will follow the formal presentation.
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At this time I'll now turn the conference over to Jeff Sonic Mr. Sias, you may now begin.
Thank you good morning, and welcome to <unk> first quarter 2023 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Todd Comfort 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.
<unk> 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 note that on today's call management will refer to certain non-GAAP financial measures, such as EBITDA or 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 final.
All information presented in accordance with GAAP.
Please refer to today's press release for how management defines as such non-GAAP measures a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call.
That presentation can be found on the company's investor website.
Agents commentary will not specifically walk through the presentation on the call, but rather it's a summary of the results and guidance we will discuss today.
<unk> you 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 Julie.
Thank you, Jeff and good morning, everyone.
The message I would like you to take away from today's call is that we are making steady progress on the key drivers of cost and margins and we committed to deliver this year and the fresh future plan, while still delivering strong growth that is in line with our long term growth plan. This is due to strong operating performance by our teams in Bethlehem and N S.
And this is another indication that the investments that we made in the fresh cut academy is paying dividends throughout the P&L.
I will share a few highlights of our performance and a few thoughts on the outlook for the balance of the year and then Todd will provide more detail on the quarter.
The highlights are first strong net sales growth, we delivered 27% net sales growth in the first quarter. This was in line with the guidance, we shared for the quarter and puts us on track to deliver our 2023 plan.
Justin measured consumption was up 29% in the quarter, but the year ago quarter included some trade inventory refill. So our net sales growth was less than the consumption growth the.
The consumption growth was comprised of 14% volume growth and 15% price mix growth, we will be lapping significant trade inventory refill in the year ago too much of this year and won't get nearly as much benefit from pricing. This year as we did last year, but our growth appears to be strong, particularly with our heaviest users.
Second adjusted EBITDA ahead of guidance as we discussed on our last call first quarter. Adjusted EBITDA is expected to be weighed down by the heavy startup cost in <unk> and the startup of our Dallas DC I'm very happy to say that both of those initiatives are completed successfully and on budget.
Perhaps more importantly, our performance on quality and logistics were much better than we had planned a strong performance on quality yielded improved gross margin and enabled higher fill rates that reduce logistics costs.
<unk> costs came in at five 3% of net sales down from six 1% in a year ago quarter and logistics costs came in at nine 3% of sales down from nine 9% in the year ago. Despite the startup costs associated with the Dallas DC.
These are both key operational areas that our team has been focused on and we are very encouraged by this progress as well as the opportunities. It provides for continued upside as we execute our margin improvement strategy.
Third more effective balance between commodities and pricing.
Input cost as a percent of net sales came in at 34, 1%, which only reflects a partial impact from the February price increase.
Looking ahead to Q2, we expect to reduce our input costs as a percent of net sales further her perspective, our Q1 performance is 180 basis points better than the 35, 9% we experienced for the full year of 2022, and 200 basis points better than the 36, 1% in the Q1 2022.
Many retailers did not reflect the higher pricing on shelf until late in the quarter, but so far it appears that consumers are accepting the pricing well.
For Anna.
And as startup DNS kitchen is off to a good start due in large part to the training and preparation the incredible team Edison supporting gets built out and commercialization.
You are now shipping product off both the bag line and roll line and are capable of producing a wide range of skus on those lines.
We're still ramping up production on the bag line, but once that is completed it will be yet another critical achievement that will unlock significant logistics savings.
I'll be able to ship the vast majority of our product assortment out of the Dallas DC using locally produced product.
Our assessment of the quality of the product produced the net adds is that it is every bit as good as the products, we produce in Bethlehem and we're doing it with fewer people due to the significant automation that we have integrated into the facilities design.
With strong customer support.
Now that we have restored customer service to a high 90% fill rate our customers have begun to invest heavily in incremental fridge placements in Q1, we added 369 net new stores.
Upgraded 241 stores to larger fridges and place second or third Chillers and 685 stores and there are many more of those coming later this year.
We are well on track towards our goal of having one 7 million cubic feet of space at retail by the end of this year.
And sixth household penetration growth.
<unk> penetration growth was 7% in the past 52 weeks and buying rate growth was 28% based on numerator data what.
What is most encouraging is that our number of heavy super heavy users grew 18% over that time period. Despite the 20 plus percent increase in pricing.
We believe this reflects solid loyalty amongst our heaviest users or hippos, a high profit pet owning households, and the impact of our flip the ball effort that is designed to increase the number of people who use fresh pet is the main meal. We now have $3 3 million hippos and our franchise.
Looking forward I expect to see continued improvement in our operations as the year progresses, we have momentum and while the intangible benefits of a more experienced and better trained team are increasingly clear to us. We are excited to see them turn into tangible benefits and show up in our financial performance.
Sizable opportunities to recover the efficiencies we lost over the last three years and a reinvigorated operations team is relentlessly focused on the biggest of those quality input costs and logistics.
Although each of these categories has its own timetable for realizing the benefits we have the critical talent in place and the progress is increasingly obvious to our team with every passing day.
Additionally, the key elements of our marketing model of being fully deployed for the first time in several years with.
We have new advertising on the air at heavy media weight that resonates with consumers customers are placing new fridges at the strongest rate ever and we have a large number of new products and distribution were scheduled to ship in the coming months.
We're also updating our packaging graphics for the first time in several years and the pre market testing has shown to elicit an extremely favorable response.
Now, let me turn it over to Todd for the details on the Q1 results Todd.
Thank you Billy and good morning, everyone as Billy said, we're off to a really good start this year, let me break it down a bit further.
Net sales came in at 167 $5 million up 27% versus a year ago, our net pricing was up 14% versus a year ago in the quarter.
That will drop to 8% in Q2 as we lap the large price increase we took in February 2022.
Growth was broad based across channels, including our pet specialty business, which saw consumption growth rebound, increasing 19% in the quarter versus prior year.
Adjusted gross margin was 38, 5% in Q1 slightly above a year ago and above our base expectation.
This improved performance was due to a variety of factors, including increased pricing.
<unk> and the cost of quality and a strong startup in at all.
All aspects of our operational improvement plan that our team is focused on.
We expect these elements will continue to improve as we move forward and drive continued margin improvement.
Now that we are shipping product from the bank line and as we are no longer capitalizing any startup cost on that line. So they will flow through the P&L in Q2, as we ramp up production, but that is putting us on a path to sustained growth increased resilience and margin expansion.
Total adjusted SG&A was 36, 7% of net sales down from 38, 7% in the year ago quarter.
Consistent with our long term trend of gaining scale in G&A.
Our SG&A costs, excluding media and logistics were 11, 9% of net sales versus 12, 5% in the year ago period.
We also gained 60 basis points of efficiency improvement and legit and logistics costs versus a year ago, largely due to very high fill rates and partially offset by the startup cost related to our Dallas DC.
We spent a healthy 15, 5% of net sales in media in the quarter and this was slightly below the 16, 3% we spend in a year ago quarter.
Adjusted EBITDA was $3 million in Q1 that is considerably better than the cadence. We we had initially provided and was primarily due to the strong operating performance and cog and logistics.
Capital spending in the quarter came in slightly below the most recent expectations at $60 million largely due to sequencing of some sort.
Feasible expenses related.
Related to completion of the first production building the chicken processing processing facility in the early stages of construction of phase two.
There is no change in our outlook for capital spending this year, which we continue to project a $240 million.
Our cash position is very strong we greatly appreciate the support of our shareholders and other investors who participated in the convertible debt offering we completed in March.
After the cost of the capped call option is factored in we realized net proceeds of $325 million from that offering.
In conjunction with our existing cash reserves at the end of the quarter, we had $387 million in cash and short term investment.
We have invested the funds in a series of conservative interest bearing instruments that will yield interest rates well above the 3% coupon costs of debt we issued.
These funds are invested across several institutions and in T bills with a maturity of no greater than 120 days.
For the remainder of the year, we expect interest income and interest expense to largely offset each other we believe that we have adequate cash to fully fund our growth through 2024, and we will be cash flow positive in 2026.
Also believe that we will have access to traditional non dilutive forms of capital to bridge a gap in 2025, if it occurs.
In terms of the cadence of our business for the balance of 2023, we expect to continue the strong growth we demonstrated in Q1, but the net sales growth will increasingly be driven by volume growth versus pricing growth.
At the beginning of Q1, our Nielsen measured volume growth rate was around 12% by the end of the quarter. It was up just around 16% and growing we need that to continue to grow into the high teens and low 25 at the end of the year to continue to support our plan.
We believe our marketing distribution and innovation programs will deliver that.
Q2, and Q3 net sales should have mid twenty's growth rates.
Q4 growth rate will be relatively lower due to the sizable trade inventory refill in the year ago period.
We expect to see continuing improvement in our operating cost in Q2, particularly in logistics and quality.
Along with a full benefit of the February price increase.
However, we will be absorbing the full operating cost of the tenants bag line in Q2 and to a lesser extent in the second half.
So that line achieved full production later this year.
The net result is year over year gross margin headwind due to underutilized capacity, which we expect to cause our Q2 adjusted gross margin to come in slightly below that of Q1 2020 Three's performance of 38, 5%.
With respect to adjusted EBITDA, our expectation is that Q2 should be similar to that of Q1 on an absolute dollar basis with the difference in some additional SG&A investments in Q2 offset by the contribution of higher net sales.
Looking at the combined quarters in the first half we expect to be slightly ahead of where we initially projected we would be at the point.
Point of the year and confident in our ability to deliver our commitments for the year based on our strong start and the sustained underlying performance we are seeing.
So we are reaffirming our guidance for the year that calls for net sales of approximately $750 million and adjusted EBITDA of at least $50 million.
In closing we are very encouraged by the start of the year the capability improvements that we announced back in September are driving solid and steady improvement in our operating performance. Further we are seeing significant significant operational improvement and the investment we've made in the fresh pet a cabinet.
And the time and money, we invest at to training and his team during the year prior to the startup of that facility. We are even more encouraged by the magnitude of the opportunities that remain ahead of US. We believe that we are on track to deliver the margin improvements required to deliver the long term margin targets, we announced as part of it.
Future plans.
And it fits in is up and operating on both lines and that provides us with the capacity needed to support our long term growth as resilience to our business and provide significant opportunities for margin expansion.
Further the improvements we design into that facility provides the opportunity for efficiency upside versus our long term projection in total that leaves us feeling very bullish about our 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.
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One moment, please while we poll for questions. Thank you.
Thank you. Our first question comes from the line of Michael elaborate with Piper Sandler. Please proceed with your questions.
Thank you and good morning.
Good morning.
Just was wondering if you could unpack the guidance a little bit you've got a full year top line guide consistent with the first quarter, but you have pricing level of pricing benefit that will moderate over the course of the year.
Can you just point to some of what you expect on the volume side in terms of.
Driving that acceleration and what kind of visibility you might have there.
Yeah, I'll take a shot at it as we said in the.
In the scripted comments that we've seen the increasing shift towards volume growth.
And less on pricing so we began.
Quarter at Q1 at 12% volume growth, we ended the quarter at 16% and we've seen it continue to grow from there. So by the end of the year, we're expecting the volume growth is going to be the driving the biggest driver of our net sales growth because pricing by the end of the year will basically end up accounting for something like 5% in the last quarter, So youre going to see it.
Increasing shift towards volume and we've already seen it.
And does that help.
<unk>.
By the step up in advertising or distribution gains or just all of the above or whats the real key.
Factor there in terms of what accelerates on the volume side.
Yes, let me just give you my comments, Scott will probably add some color to it but as we said the reality is we're now back in business doing business. The way we want to so we've got full fridges.
High fill rates, we've got a broad assortment of product advertising on the air heavyweights, new advertising better packaging a lot more stores a lot more upgraded store so that.
The growth is coming from and we will continue to come from our business model, our marketing model working the way we wanted to work.
Yes, I think bill hit on most of the points, but I would say the overall model is intact and it's continuing to perform and we've got penetration growth.
Most interesting aspect, we talked about at ICR. We introduced this idea of like the Super heavy heavy or hippos that Billy mentioned in the script.
See really strong growth from that group, we really really like that those are our core core consumers, thereby rate is up substantially the number of fridges that will place. This year will be extraordinary it will be an all time record for the company. The number of fridges in total that we placed this year, which gives us the platform to continue to expand our portfolio and appeal to a larger group of consumers.
So it just feels like every single things hitting on all cylinders and then you couple all of that platform with great great advertising.
<unk> continues to drive record traffic to our website, which we know converts to the store locator, which we know converts to eventual people coming into the brand and it really is all working together and I think we're in a really fortunate position.
Okay, that's great and just a quick follow up on the AD spend.
And sorry, if I missed this I don't know if you said it but the.
It is the second quarter spending level.
Similar to the first how does that play out as far as the trajectory over the course of the year.
Yes.
Q2 will be a similar level to Q1 and will be fairly heavily weighted to the front half of the year I don't know if we've actually split it out that way, but over a little bit over 60% of the advertising will be in the first half year, 65% or so yes heavy spend in the first two quarters is actually Q2 is projected to be up slightly over Q1.
And then it tails down in the second half of the year, but unlike last year, where we spent very little in Q4, our expect our expectation is we will spend at a reasonable amount in Q4 as well.
Okay, great. Thanks, so much.
Thank you.
Our next question is from the line of Bryan Spillane with Bank of America. Please proceed with your question.
Good morning, guys.
Just a quick ones for me one just a clarification on the guidance slide adjusted EBITDA <unk>, we're talking that you're expecting to be similar to <unk> in absolute dollars not year on year growth.
Correct.
Hey.
And then.
Billy maybe Scott maybe if you guys can just maybe zoom out a little bit I know there's been some concern just about the household spending consumer spending being under pressure and again youre now kind of getting back up to the curb. So if you could talk a little bit about just as you're back in the market and your fee.
Rates are better just your observations about the consumer or is it more heavy users.
Using the product more is there any barrier to attracting new households.
Kind of how the whole macro environment is playing into.
Your growth expectation as you know we are beginning to add more product in the market.
Hey, Brian .
I think that we talk about this a lot and we literally look at it like every couple of weeks very very closely and we I think we have pretty extensive data that goes fairly deep down into understanding exactly what the dynamics are and yes, I mean theres been.
Theres a lot of discussion in the market around and kind of what's going on from a consumer standpoint, where.
There have been people that have changed there.
They are concerned about the economy. They are concerned about inflation et cetera, I think that we have really been an exception to that case.
We have we have definitely seen some of our kind of weaker non frequent consumers kind of move out, but we have focused on and we started focusing literally at the beginning of the year to make sure that those heavy in those hippo consumers are the ones that are really kind of coming into the brand and continuing to buy us et cetera. So.
I think that there has been a lot of discussion around the category level around what's going on I think that we've been fortunate that we have not really had much impact from that and we feel like we're on a really terrific course.
For this year and getting the right types of consumers and we continue to see interest in the brand and the proposition that we're bringing to market and also we are always really cognizant of trying to make sure that the entire portfolio has.
As affordable and accessible to as many consumers as possible and we always are keeping an eye on that and we continue to do work in that area.
Thank you.
Thank you. Our next question is coming from the line of <unk> <unk> with Oppenheimer. Please proceed with your question.
Good morning, and thanks for taking my question. So I was just curious as we look at your gross margins just I think last quarter. You guys indicated that you expect gross margins to be up more than 200 basis points. I'm curious if you saw the same expectations for the year.
We do at this point look we're really pleased about Q1, obviously came in a bit higher than our original projected a little bit of that was timing we built a little.
A little more inventory in Q1 that got capitalized.
For the quarter that probably will come back in the second quarter look it's really early we're off to a great start.
And so it's just too hard to call the remainder of the year, So really no change in the expectations.
At this point, but.
We're really pleased with and this is still ramping up we haven't started chicken processing there that facility yet so we've still got a little bit of a wildcard going on but.
Feeling really good about to start the year with passion.
Great and then maybe just one final question I know you've launched the fresh foods discretion with Petco, just curious how that launch is going at this juncture I know it's early just curious if it's already in stores and how that's progressing.
Yes.
Currently around 300 stores at this point so it's super early.
We.
We've done I think a really really high visibility on a really good response from it at this point it is super early.
I think we remain super enthusiastic about the potential of it and we will start to support it literally in the next couple of weeks.
Once we kind of have everything kind of flattened out and kind of come down from a supply chain standpoint with that specific product. So we're starting to support. It then I think that that point, we will start to get a real feel for consumer like interest broad consumer interest and.
And just to kind of what type of size of the business that will be over time.
Great. Thank you.
Our next question is from the line of Bill Chapell with <unk> Securities. Please proceed with your question.
Thanks, Good morning.
Good morning.
Hey, just on a pricing standpoint, I understand that your success in pushing through this pricing, but maybe you can talk about where you stand in terms of price gaps with the competition and what you expect.
The categories do and pricing as well as costs do come back or pull back in the back half of the year and we get maybe a more a little more promotional environment understand that you have a differentiated product and then the kibble, but but still there is some pricing dynamics between the two.
Yes.
We've been watching this closely and I.
You could definitely imagine where.
In certain environments, there would be increased.
Spending and promotional support activity.
Really haven't seen any of that pick up yet.
Currently possible and I would say, it's actually at this point, even been slightly below some traditional levels historical levels. So.
I think some of it will come back in.
In the past that Hasnt had a tremendous impact on our business as you brought up.
I think that it's a pretty rational category and I think you have pretty rational players in place.
I think people recognize that they appreciate the profitability of the category and I think that I think it's going to be rational behavior from pretty much everybody, including the retailers, which will which will really be the ones, who either drive it or suppress it.
So I.
At this point I mean, it's hard to exactly speculate what could happen later in the year, but I don't I don't see it getting it gets irrational in some categories I have not seen that and had over time.
But the price gaps with competition, where you want them to be right now.
Yes.
Yes, we like where we are and we're watching that and I think the biggest thing that we're seeing with.
Called out.
No matter, which way you look at it our volumes continue to grow whether you look at prior periods literally from the beginning of the year until now it's been really really nice consistent.
Volume growth, so I'm looking at pounds and at this in this case when there's so much going on with all of them going in pounds, if youre, increasing pounds and units Youre doing great work in this type of environment and that's what we're doing we've seen the we go back on air we are completely very very very low levels of any type of advertising in Q4, we go back on air and we.
We consistently see our pounds continue to progress through the first quarter, which I don't think anyone could have asked for anything better. So so I think what the market is telling us that the price gaps are acceptable like where they are and consumers continue to come into the brand and spend a lot of money with us.
Got it and then Billy I know household penetration and market share are not interchangeable.
Yes.
Several years ago. The thought was you had kind of.
Low single digit market share in.
Nationwide, but you had close to 10% in some of the West Coast Albertsons now Youre talking about household penetration being close to 7%.
I guess just trying to understand.
As capacity comes online, where do you think household penetration and market share for that matter tango.
This year and next is it are we talking double digits are there any barriers are the keys to unlocking that such as like more fridges per door or stuff like that any color would be great. Thanks, yes, yes.
It's one of the issues that we watch very closely obviously with all the rapid price increases that have gone into the market. What <unk> seen is the occasional user of the person who used us as more of a.
Indulgence or an extra as opposed to the person who uses us that use us as the main meal has been a little bit less willing to bring on a new habit or continue a habit that might have viewed it discretionary the flip side of that is 87% of our business that is the hippos are the people who view us as the regular main meal had been growing at a very very <unk>.
The rate I actually did a little exercise to look at it for that if all consumers digesting basically four price increases in 18 months.
You have to lean hard on the heaviest users the people who recognize the benefits whose dogs don't want to change can you get from here to where you want to get too on the backs of those consumers and the answer is yes, you can get there.
But over the longer haul, we do want to get back to where we are bringing in new users at a much more aggressive rate in the 7% we reported in the first quarter. We just think it takes longer for them to adapt to the new pricing. That's in the market. They just don't go through as many purchase cycles when youre not a heavy user and it takes a couple of purchase cycles for them to adapt so by the end of this year I would like to see that.
In the double digits and frankly by sometime next year I like to see the number being in the 20% range.
Yeah.
Thank you.
The next question is from the line of Peter Benedict with Baird. Please proceed with your questions.
Mr. Ferranti. Please go ahead with your questions.
Hey, guys. Good morning. So first question is on the <unk>.
Actually channel the acceleration you saw there was that.
Just kind of better in stocks you think drove that was there anything any of the players in that in that channel we are doing.
To help get the better velocity there.
Our in stocks were particularly bad even through the very end of Q4 in pet specialty. So just the return of full fridges.
I think is a really really big piece of it secondarily, we are seeing nice expansion in fridges at pet, especially through the course of this year that will be a help it is not really kind of shown in the numbers at this point, but that will be a continued health over the over the course of the year.
Yes, I think those are the two aspects, Peter and making sure that the products and the portfolio is.
Well represented not only being in stock, but also really being as sharp as we can on pricing.
Got it understood and then maybe just two quick ones for Todd just curious on commodity input costs can you get us up to speed on that chicken beef, just kind of where you stand what you've got locked in remind us on that and then.
Just the DNA line.
Taking a look at that kind of annualize the first quarter that gets into the high <unk> for the year is that.
We should be expecting from DNA. This year. Thank you.
Yes, so steady as it goes on commodities. So we're locked in around 80% no big swing. So we're still kind of seeing.
Mid to upper single digit inflation, so much better than we've seen in the last couple of years. So thats positive that will allow us with the pricing we have in place to get some margin expansion there.
No no big swings of commodities and we're I think we're in pretty pretty good shape.
From DNA perspective, yes.
In total.
Around 60% both up in gross margin and down below and that should be close to the run rate for the year.
Great. Thanks very much.
Sure.
Thank you. Our next question is from the line of Jason English with Goldman Sachs. Please proceed with your questions.
Hey, good morning folks thanks for sneaking me in couple.
Couple of questions first I guess really coming back to your new user comments. The penetration data you shared a 26% last year and rolling 52 through April 3rd having now dropped to seven.
It just really sharp deceleration.
Perhaps even outright declines in the math would actually would suggest outright declines.
Year to date over the last three months.
What's driven such a sharp DSL there.
Why the setback and how do we foot it with the volume, which actually looks fine.
Yes, it's a good question.
First of all you have to remember the number on the household penetration isn't is a net number. So if you end up with some number of consumers who are your sort of discretionary purchasers.
Not purchasing our purchasing less frequently you can see that number go down regardless of whether you've added added new users and so I think what my comments were intended to say is that bringing in new users were still bringing in new users, but there are some number of people out there for whom this was not a critical purchase it was more of a discretionary purchase those are.
Folks who are not continuing or not continuing at the same rate that we had seen before the flip side is the people who had been buying as the main meal became even more committed than before the most encouraging part to me was not only did they absorb the price increases the increase the increase the buying rate beyond what the pricing would be so.
And our data was shown 41% increase in the dollars that we're getting from the Super heavy users and so that's encouraging is that people, who have decided that where the main meal or continued to.
<unk> and bias at a heavier rate I think over the long haul, though we do need to get it to the point, where we're bringing people into the in the front end of the funnel at a more rapid rate I think for price increases in 18 months shook out some of the people who are more discretionary buyers and now we're focusing on bringing in new people, who are going to move along that purchase curve and become superheavy.
Users in the future.
So one believes it right that year to date last few months youre, losing as many consumers as you're bringing in.
I don't think Thats right, but I'll have to look at the data on that I don't think that theres been some moderate growth yeah.
Okay. Okay. That's helpful and then everything you're talking about in terms of more retail presence more advertising.
Better on shelf availability better packaging all of that sounds great.
Clearly you've been lenient.
Why are we seeing more acceleration in <unk>.
Your guidance would suggest likely despite we are no longer lapping the shipping headwind.
It's not really going to look a lot better.
Why the growth rate in Q2 is not a stronger growth rate in Q1, yes, yes, that's right exactly is given the investment given the acceleration in volume given that we no longer have a two point drag on cycling.
The prior year shipments.
Yeah, I mean, we haven't given you a specific number we said sort of in the mid <unk>, we'll see where it ends up shaking out when it's all said and done we like the trends we're seeing we feel good about the trends that we're seeing but we want to see it all play through and there is obviously there is some price pricing that kind of wings off in Q2, and as Billy said earlier the volumes are coming in really really nicely.
<unk>.
In total we feel good about the way, it's rolling up but publicly we've all got a bit of a benefit from pricing. The good news is our volumes are still really really strong I mean, Jason the other thing to consider with fringes as when a fridge goes in it takes literally six months for it to have significant impact so even the fridges that we're putting in now that you can kind of start banking on those for the back half of the year.
When they really start contributing in adding significant.
Incremental.
For the business.
Makes sense alright, thank you.
Thanks.
Our next question is from the line of Mark Astrachan with Stifel. Please proceed with your question.
Hey, good morning, everyone.
Good morning.
Just to follow up a little bit on the last line of questioning there.
Advertising spend increasing expectations that will continue to increase.
Especially through <unk> I guess I'm curious are you thinking about.
How the return is today versus historical levels. The correlation has always been very strong.
It is strong as it's been in terms of the advertising spend to sales growth.
You could elaborate there would be helpful.
Yes, I think I think <unk> touched on this concept to and really what we're seeing is just like when you go through a change in the economy. There are certain businesses that basically don't come through right. They just they wash out basically and I think there are a group of consumers that are in the category. There were also some.
More in fresh that that are kind of moving out so what it does is it.
That's shown in the total number.
And so you are losing some of these people that were occasional low level buyers and as you move through those <unk>.
Got you start to get to your real core group of consumers and you kind of start to return to the model that we've had for 10 years, where we spend dollars and we see that.
Productivity in the advertising and then the CAC.
The way, we think about it so I think we're going through a transition period, where we're flushing out some of those weaker less committed consumers that were buying us occasionally that may have gotten some type of economic stimulus that may have had enhanced savings for a period of time et cetera. So I think thats, what were seeing and were going.
Through so when you're asking about the return we believe we're getting here's what we know we know we're getting the best response ever to the television advertising. We know we're getting tons of people going to the store locator and historically again for 10 years, we've been able to see people go through that and come into the brand what's being kind of mass.
By some of those less dedicated consumers, leaving so it's hard to calculate exactly the return, but we believe that nothing has changed that we've seen for really really long historical periods and that as we kind of move through this in the near term, we will get right back to similar types of returns on when we spend.
What we spend in advertising will drive incremental new consumers.
Got it and from a consumer standpoint.
And those that have left can you get them back or is it about going after new kind of.
Non Russian pet household.
Day.
I suppose if you're not going after the law.
Households that have come in and out because that then reduce the longer term opportunity.
Yes, I think that I think globally.
Two things we presented at ICR that I think.
Important to that one of them as we continue to see and this is like five or six year trend that we demonstrated where the total addressable market for fresh pet food is really continuing to expand and I don't think theres anything has changed the direction of that I think there is some short term disruption in that which is the the commentary I was just I was just.
Referring to.
So I don't think Theres really been any any change in that and it will continue to.
Continue to grow overtime.
So I think that's.
Where I am Marc Marc I would just add to that is.
I think that what we're seeing is as people are increasingly recognizing <unk> as a main meal item. We are seeing the buying rate become an increasing driver of the growth not what we model that's not what we built out but at some point that will be a critical driver of growth of the business that people recognize it we just happened to see it in an environment, where both who are committed to the brand.
<unk> are very very committed and those who people for whom there was a more discretionary purchase they are less committed.
And the other thing I'm sorry.
We touched on at ICR.
We mentioned this idea of these hippos, we've talked about it couple of times on the call about targeting that group.
That's really where we're seeing the increase in not only households, but also the buy rate. So it's really the strategy that we put in place in the beginning year seems to be playing through well.
Got it thank you.
The next question is from the line of Cody Ross with UBS. Please proceed with your questions.
Good morning, Thank you for taking our questions I just wanted to dig in a little bit on the EBITDA because it came in about $5 million to $6 million better than your guidance here.
I think you mentioned that gross margin is to us.
As opposed to sequentially be sell a little bit here can you just unpack that for us and just explain to us what those drivers are and then how you expect the cadence through the back half to trend and then I have a follow up thank you.
Yes, so I mean.
The breakdown Q1 first so.
Just like kind of direct input cost pricing versus commodities actually improved by about 200 basis points. So we've talked about how we've fallen behind the last couple of years with inflation, we're starting to get a nice chunk of that back.
So that's great news quality costs were favorable by 80 basis points. We're seeing continued progress there and then as we gave everybody a heads up on Hey look we are bringing on some new lines in NSA, there is going to be absorption absorption issue.
Through the first half of the year, particularly and.
And we saw that by about 250 260 basis points in Q1 that will actually get a little bit higher in Q2.
We bring.
Full cost of that second tenant blind employees everything else, we feel good about it's really that incremental absorption that's going to kind of hurt us in Q2, as we build into as we grow into the volumes of <unk> in the second half of the year as we've been saying our volume.
Okay.
Then trending up nicely as we build into that volume in the second half of the year, we'll start to leverage that facility a little bit more and we will be lapping all of those costs of last year. So again, a slight headwind and versus Q1 and for Q2, and then we expect it to be much stronger in the second half.
That's helpful. Thanks, and then I just have a follow up here you.
<unk> had some new entrants in the category and you took two rounds of price over the last year can you just discuss the trial trends and if youre seeing any change in repeat purchase behavior. Thank you.
Yes, there have been a tremendous amount of people that are that have entered and we track that very very closely.
Maybe I'll touch on that first so.
A year and a few months ago, we talked about us having 96, 4% of.
What was out there in fresh and frozen food.
And today, we're at 96%. So basically if you think about it over the course of a year and a few months, we launched four tenths. So I think that that's probably the most illustrative Pete way to think about there had been a ton of entrants they havent really grown in size.
And we have maintained basically our share of the offering.
And I think the performance of almost all of them has been really I would say it's early early but I think they are very kind of sub par what would make retailers very excited about it at least from what I can tell.
So I think that's probably the most important aspect of it so when we look at trial and we look at <unk> and I think it's.
Illustrative and some of the stuff that we.
We're talking about with the hippos, where we're getting.
Our buy rate is the thing that's been extraordinary and really driving the business.
It's driving it more than almost ever before and I think that that naturally demonstrates the dedication that consumers have the products once they try it and we have not made it particularly easy for people over the past more recently its been much better but up until literally the past like 60 to 90 days, we have not made it particularly easy for people.
To get the products they want in the side as they want all the time and we still have plenty of work to do in that area. There are still some pockets across the U S, where we definitely have opportunities to make sure our bridges, our fuller and our.
Our better represent our full offering.
Thank you.
Our next question is from the line of Jon Andersen with William Blair. Please proceed with your questions.
Hey, good morning, two quick ones I was wondering if you could talk about the cadence of the new the fridge placements that you expect during the year I think your number of net new stores is up 7% in the first quarter.
But again help on the cadence there and then also on media for the year what are your expectations for media spend as a percent of sales.
Full year basis. Thank you.
I'll touch on the Fridges real quick and then Todd can.
<unk> hit on the media percent of sales.
Yeah.
Really the way the year is laying out as Q2 and Q3 will be our biggest ads for fridges.
And it's not just new placements will actually end up with almost double the number of <unk>.
Second and third fridges this year than we actually have a new placements and I think the important thing to notice.
And third fridge, a second or third fridge and a high velocity outlet is worth the same as the new fridge for the most part so it's.
I think that.
<unk> hopes hopefully dimensionalize like the impact that that new fridges can have and again the second and third fridges are a critical component to us continuing to build out like what we are building out for a fresh pet food.
And from a media perspective, and we'll spend close to 11% of net sales this year and first half second half first half somewhere in the 60% to 65% of that spend will occur and as I mentioned earlier on the call the big change in the back half as.
We will spend a lot more in Q4 than we did this past year.
Thank you.
Our next question is from the line of Ken Goldman with Jpmorgan. Please proceed with your questions.
Hey, good morning.
Good morning.
Obviously.
And we talked to you guys talked about this a little bit there is some great numbers in terms of buy rates and overall.
Shipment trends I didn't want to.
Come back a little bit to the questions on household penetration, though especially for the non pippo users.
Only because I just wasn't quite sure what the plan of attack was from your perspective.
Again, youre focused on the hippos this year I get it you can't be everywhere all at once but.
Is the plan just to sort of for now kind of advertise and hope that the <unk>.
Shock I guess of higher pricing phase.
Are there other things you can do can you introduce smaller packages can you do more targeting at targeted ads I guess I'm just trying to get an idea of sort of what the strategy is and kind of what the path ahead is for what we should expect for household numbers over the rest of the year.
Yeah.
So Ken as I will touch on a couple of things that we probably hit on but I will I will expand.
Few different comments so.
Look we.
At ICR, we did mentioned this idea of like we wanted to focus on <unk> and one of the things that we've done in that area is when we think about the advertising that we're putting on air.
We're now at a point, where we're comfortable and we're willing to basically be more aggressive and I think more direct and what we're trying to communicate and that will that has been demonstrated to attract and bring in the hippos into into the brand. So we kind of set that out.
At ICR, we knew that the advertising is going to change.
Youre seeing our advertising kind of pick of course.
You've seen some of the things we had on earlier in the year.
<unk>.
The skies, where we're talking about dry pet food youre seeing what we're doing now we're picking consumers that are really really dedicated to their pet and we think thats really a core piece of not only this year, but long term strategy to focus on these hit those.
I do think that when the category gets when all of this pricing and it's not even pet food pricing, it's pricing of my grocery bill when people finally get more comfortable and digest the overall pricing with their grocery bill and they will I mean, it's been shown over the past 50 years that when these things go through eventually.
We'll get more comfortable where the pricing is in a return to more normalized behavior. I think we're going to get a lot more of those consumers that are a little concerned about where the economy is.
I think we will start to see some of them flowed back into the brand and again they are not as valuable they're just not as valuable but what we're doing in the meantime, and I do think this could be 12 to 18 months before we get to this normalization as we're getting as sharp as we possibly can on every aspect of the base model, which is the advertising the products that we offer.
The price points that we have on especially key entry sizes.
And we're also launching a couple of products that are kind of more a little bit more value oriented and a little bit we're calling them limited ingredient products. We are starting to offer those products up and including one of the things that we will start offering up in the next kind of six to 12 months is basically bulk packs.
And in those bulk packs, we think it will dramatically change buying behavior. If you look at the top 13 items and wet pet food. They are not single items. They are bulk pack and we think it's time for fresh pet to start introducing our product portfolio expanding out when we give someone the ability to buy not one or two at a time, but now buying <unk>.
Four six or eight at a time, we've been able to test. This we've been able to demonstrate that there has been success in doing that and we will start offering those on a broader basis across the country over the next year.
So that's definitely a piece of what we're doing over time.
The other thing is just getting back to the fundamentals on what we're doing which is the advertising works the portfolio works the new products that we've always brought the innovation we brought works.
And if we're doing that well with these other pieces, we feel really great about the business plan.
Great. That's helpful. And then a quick follow up if I can you mentioned that again. The first quarter was ahead of your expectations I think most of it was quote unquote organic but you mentioned there was a little bit of a benefit from timing. Some inventory capitalization is there any way to quantify that and think about how much of that reverses in <unk>.
Yes, we had about $1 million benefit approximately from that we also had a $1 million benefit from some miscellaneous sales and marketing spending non media expenses that we believe will happen in Q2. So those are the biggest pieces.
Thanks, so much.
Thanks.
Our next question is from the line of Corey Grady with Jefferies. Please proceed with your questions.
Hey, good morning, and thanks for taking my questions I wanted to follow up on your comments on fridge placements for the year can you just remind us of your decision process to add a second or third French and what the volume step up benefit you see.
From the new fridge.
You can what portion of.
Your stores are.
Second or third fridge candidates. Thanks.
Okay. So.
This has been a multi probably multipart question and answer.
Going to try and address it at a fairly high level and then we can definitely talk in more detail.
When we get to the <unk>.
One on one calls.
So when we look at.
When we look at a retailer there is definitely a threshold for different stores.
That we would put a second or third fridge in and.
Typically what we do is we will start off with the top 20% and every retailer there are different retailers that have different volumes.
But what will take us.
The highest volume retailers with the highest percent of velocity. So we'll take the top 20% of stores and those are typically the first candidates for a second the second fridge and then what we've seen over time is.
As those progress retailers are interested in taking the next 20 or 30% of their fridges and putting second and sometimes even a third in the first 20.
So we're starting to continue to see that progression and really what you what.
The most important aspect to it.
<unk>.
If we look at dollars per store per week, and we consistently see increases in dollars per store per week over time.
That is the core aspect. So we're seeing those consistent dollars per store, that's going to open up the entire network to more and more second and third fridges.
No.
Hopefully thats, giving you a little bit of a feel for it and I would say today, we have the opportunity for about half of our network to have either a second or third fridge.
It's applicable and then what we tend to end up having to wait on is when there is these reset cycles, where retailers are willing to touch the eye on a pretty big way because the takeout.
Feet of something and put in a second fridge is a.
Second or third bridge can be pretty significant.
So I think that's that's.
Probably a very broad way to think about it.
And year after year, we can continue to see same store sales increases and the dollars per store per week and that really continues to open up more and more of the network. So the more we can do from an advertising standpoint.
Grow penetration viray et cetera, I think the more opportunity we will have over time for a second and third fridges.
That's really helpful. Thank you and then I noticed that <unk> been asked a few different ways, but just to follow up on household penetration.
Just from the 7% growth you saw this quarter I mean is that in line with your expectations to get up to 20% plus by year end.
And then I mean do you expect household penetration to be more back half weighted and should we think about that as kind of making up for pricing benefits rolling up. Thanks.
Yes, I think the way we had planned it was we thought we would see a little bit higher overall penetration like again, we like when we talked at ICR in January we started focusing we wanted to focus on these hit both of these higher value consumers.
And we started to deliver on that.
I think that we anticipated slightly higher overall penetration and I think what's over delivered as the hippos and also the buy rate has really honestly over delivered from what we kind of had really budgeted and planned but I think what's happened is we've seen.
And it's amazing.
Like if you look at where the category is it amazing what the category is doing and what we're doing the category looks like kind of it's a little like some brands I think would be very upset with where they are and I think what's happened is you have people that deload pantry is a little bit and that stretches a little bit you have some consumers that arent getting some.
<unk> stimulus and that changes the dynamics of when they are buying and number of consumers.
So I think once we kind of go through this cycle, we're going to return to kind of a much more normalized growth and penetration I would think it would be towards the back of the year that.
That we'd see kind of more normalized overall penetration and if we can hang on and make progress on the hippos like we're doing it could be something that expands our overall revenues.
Thank you.
Our next question comes from the line of Jim Suva with Stephens. Please proceed with your questions.
Hey, guys. Good morning, Thanks for squeezing me in.
I just wanted to ask as you're looking at the retailers that are adding these second and third bridges is that incremental buyer just high frequency user that now that there's more availability. They are increasing their buy rate or does the secondary third fridge bring in a new incremental buyer that maybe.
As busy and they usually don't go theres, some theres more opportunity you see incremental buyers.
Yes.
Theres, probably two major aspects of the second fridges.
In some retailers it literally gives us enough holding power, where we can actually get through a weekend. So literally on some of our highest volume items like our six pound roll for example.
Which are some of our most loyal users.
By they'll come in on Saturday afternoon, and it sold out and Unfortunately don't get stopped as well as we would like so it gives them some additional holding power in some cases, so you get a binary pickup from that aspect. The second thing that we've been able to do and really demonstrate over time is as we add a second fridge. It allows us to add.
Certain items.
And we think about items very differently than I think certainly CPG companies. It's our fridge, we want to make sure that spaces as productive as possible.
Not trying to just to kind of get a few inches from somebody else. So what we've been able to do is as we expand the portfolio of products and offerings.
Find products that appeal to a slightly different consumer group or broader consumer groups. So it does help to expand penetration within that individual store and I think all of those details.
Which many retailers have been extraordinary shopper card data on and when they see some of those aspects. That's what's encouraging them. In addition to the overall kind of high level holistic data when they look at some of those details around the individual impact in the aisle the Bahrain driving new consumers in the frequency that it drives for the cat.
<unk> et cetera that is some of the final deciding factor for them to put it in the second and third fridges.
Just add to that in addition to the holding power benefit and the.
Extended assortment that the second and third purchase provide there's an amplification value of our advertising I think of it as virtually every CPG manufacturer would kill to have a very large off shelf display or whatnot, we have lighted four foot wide input Paul fridges sitting in ILS, Let me put a second one in or a third one forming an island.
We are an end cap it has an amplification value of the advertising that is very sizable and if a reasonably good sized retailer does it in a meaningful number of stores, we can actually see it.
In the Nielsen data.
And so there is that benefit and we frankly.
I think that is a significant added value to the advertising.
Okay, great and if I can maybe sneak in one last follow up on that.
As you add in a retailer that has a second or third bridge does that provide kind of a shield around the pet aisle that makes it harder for a competitor to get products and theyre going to be talk about the competitive landscape. If you add the third bridge does that mean that there is no availability for them are significantly less availability or does the pet aisle.
As you add in a retailer that has a second or third bridge does that provide kind of a shield around the pet aisle that makes it harder for a competitor to get products and theyre going to be talk about the competitive landscape. If you add the third bridge does that mean that there is no availability for them are significantly less availability or does the pet aisle.
As a whole just expand.
As a whole just expand.
Look I think that it helps expand the competitive advantage, but by no means does it limit anyone else from coming in and putting.
Either their own fridge or the retailer put a fridge in.
I believe.
Bill you mentioned that periodically, but five years ago, we came up with a strategy and part of that core strategy was we want to change the way consumers think about pet food, we want them to think about fresh first or flipping the bowl, sometimes it's referred to and we want retailers to think as fresh first is they are building out their aisle and I think what's starting to happen.
As they recognize that fresh food has all the benefits of what they see in other areas of the store.
In pet food now and that it's a really meaningful piece of their category and I think they are building out.
And there have been a few retailers that have added some of their own their own fridges out there. So I think it's.
It's great for Us and I think it's encouraged some retailers to see what else they want to do to build out the segment.
Great I'll pass along thanks, guys.
Thank you.
Our next question is from the line of John Lawrence with Benchmark Company. Please proceed with your question Hi, Good morning, guys. Thanks for squeezing me in.
Bill you've mentioned for a long time that as you get better fill rates up that these retailers would come back.
Talked a lot about these retail partners, but.
When you look at are there new people that are coming to discuss this category with you that <unk> been after for a period of time. They went through the lower fill rates and now they're coming back and you've mentioned some of those decision matrix and what they are looking at.
Can you expand on that just a little bit whats happened since you've really restored our.
These feel rates in.
What are the retailers what are those discussions like maybe the first term.
And then the second and third fridge.
I'll, let Scott take that one he is closer to that.
Yes, it's actually been I think pretty exciting to see that once we were able to make sure that we had enough supply.
That retailer's current retailers were willing to expand and have discussions around second and third and to be really excited about it I mean, there were times, where they were they were almost coming to us and they were expanding the store lift even more sometimes than what we had maybe broader mentioned to them, but I think the other dynamic is.
There are some retailers.
There are a few retailers not many that have said no for very very long periods of time and I think in the last during the last 90 to 120 days, we've had a few of those actually.
Be receptive to having conversations and I think it is going to open up a few additional retailers for us, which we'd like to see we want to we believe that we should be able to be in 90% of all the stores kind of typical grocery mass club.
Stores out there we should be in almost all of them.
With some type of offering it may not be eight feet of bridges and all of those stores, but theres some type of offering and the majority of stores out there.
We started to see see that open up and boy I mean.
We didn't have supply not only were we not encouraging it.
But it was.
They werent interested either why why would you want to add anything in where you can't have product to offer a consumer and you are taking up space for something that you can sell so I think we're starting to see past that.
So anyway we're.
We're kind of excited to kind of see that develop.
Great. Thanks, Good luck.
Great. Thank you.
Thank you.
At this time of reach end of our question and answer session now I'll turn the floor back to Mr. <unk> for closing remarks.
Great. Thank you very much everyone.
So I always like to end with a quote the source of this quote is unknown, but it is very app. The quote is it's no coincidence that man's best friend cannot talk to which I replied reward them for their silence and feed them freshmen.
And I'll actually build on that Theres for pets and the dogs in the freshmen family that I want to recognize rocky, which was one of the dogs and our advertising Angus Macy Gray and Pinocchio, who was one of the dogs that.
Of our head of R&D and has helped us develop many products along the way.
Great. Thank you very much everyone.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
You may disconnect your lines at this time, thank you for your participation.