Q2 2023 Freshpet Inc Earnings Call
Greetings and welcome to the fresh Pet Inc. Second quarter 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the call over to your host Mr. Jeff Sonic.
Buster relations at ICR. Thank you you may begin.
Thank you good morning, and welcome to fresh Pet's second quarter 2023 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Todd confer Chief Financial Officer, Scott Morris Chief Operating Officer will also be available with us 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.
Refer to the company's annual report on Form 10-K filed with the SEC and the Companys press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
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 on how management defines such non-GAAP measures a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call.
That presentation can be found on the company's investor website.
Managements commentary will not specifically walk through the presentation on the call rather it's a summary of the results and guidance. They will discuss today. Additionally, we'd ask that your questions remain focused on the performance of the business and the results in the quarter management will not discuss the upcoming annual stockholders' meeting or 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 take away from today's call is that the fresh pet business has real momentum on both the topline and the bottomline in both areas growth and operating efficiency. We believe that we're still just scratching the surface of the enormous opportunity ahead of us and remain convinced that fresh pet food is the future of pet food and we believe.
That fresh pad is very well positioned to lead the transition to fresh for many years to come.
In Q2, we made significant progress on the adjusted EBITDA improvement that we committed to delivering this year, while simultaneously re accelerating the household penetration and volume growth that supports both our near term and long term growth targets. The operational improvements are the result of the intense focus and organizational capability we have built.
In the areas of quality logistics and input costs and an improving operating environment.
The Reacceleration household penetration and volume growth are the result of our unwavering focus on three foundational pillars that underpin our strategy the strength of fresh pet proposition exceptional support of our customers and our long standing demonstrated marketing and innovation mastery.
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 and an update on our guidance for the year.
The highlights are first strong net sales growth, we delivered 26% net sales growth in the second quarter, and our 20th consecutive quarter with greater than 25% growth.
This quarter's growth was in line with the guidance, we shared for the quarter that called for mid Twenty's growth and puts us on track to deliver our 2023 plan and our 'twenty 'twenty seven goal of $1 $8 billion in net sales what is most encouraging is that unlike many other CPG companies our volume consumption was strong.
And the growth is accelerating as the year on year benefits of higher pricing receipt.
<unk> volume growth in the quarter accelerated to 18% up from 14% in Q1 and 12% in Q4 of 2022.
Pricing and mix contributed a little more than 7% to our growth in the quarter.
Second household penetration growth as we had anticipated household penetration growth reaccelerate in the quarter once consumers digested the higher pricing that we've implemented over the past 18 months. The 52 week household penetration was up 10% versus a year ago, and then more near term meetings, such as the 13th week and four week measure.
Others are up even higher which foreshadows positive momentum for the annual growth rate.
Encouragingly the rate of growth amongst our heaviest users hippos was higher yet up 17% versus a year ago in the quarter on a trailing 52 week basis.
Additionally, the buying rate for our franchise remains well ahead of our expectations and was up 19% versus year ago.
Third adjusted EBITDA well ahead of guidance. This was a breakout quarter for our operations team as we discussed on our last call second quarter. Adjusted EBITDA was expected to be in line with Q1 and weighed down by the heavy startup cost and Dennis and the startup of our Dallas DC.
We greatly exceeded those expectations due to strong performance across every part of the P&L with the biggest improvement coming in logistics.
Logistics costs improved by 350 basis points versus a year ago, and 130 basis points versus Q1, primarily due to strong fill rates and the successful utilization of our second D C.
But we also had strong performance on input costs quality costs and SG&A as a result of this strong performance and the continued improvement we are seeing we are raising our adjusted EBITDA guidance for the year.
Todd will provide more detail on the rationale for that but you should take away that we are very encouraged by the improvements we've made in the efficiency of our operations and confident in our ability to drive further improvements.
Could also take away that we are well on track to deliver the cost improvements embedded in our 2027 goals.
Fourth we prove that fresh pack to grow strongly even when price at levels that reflect higher commodity costs. We've now taken price increases totaling accumulative impact of approximately 27% over the past 18 months to reflect the higher input costs, we have absorbed.
Despite this higher pricing volume growth continues to be strong and is accelerating.
This demonstrates the strength of our brand and the fresh pet consumer proposition.
Input costs as a percent of net sales came in at 34, 4%, a 240 basis point improvement versus the year ago. This reflects the full impact of our February price increase any more stable input cost environment.
These gains in hand, we are well on our way to achieving the necessary savings that underpin our 2027 goal and we believe we have an opportunity to drive further operating improvements in areas such as production yield cost savings initiatives, and some increasing scale benefits and purchasing.
However, our goal is to make fresh pet accessible to the broadest range of consumers that we can and improving cost environment will help us to avoid further price increases while efficiency improvements will generally be used to restore our margins and generate higher returns on our invested capital.
Fifth the N F kitchen startup continues to deliver.
The honest kitchen is now operating one bag line in one roll line on the 24 seven schedule and the chicken processing operation is up and running providing large quantities of chicken to our operations as planned.
We're also producing the full range of Skus that were planned for the N. S facility. These demonstrate the thoughtful execution of our operating team and we remain very optimistic about future gains we can realize as we ramp up to full efficiency to support our long term growth.
We were in the early stages of planning to start up the second bag line in N S and expect to be producing on that line in Q1 of next year, which means that we will begin hiring the staff and then commissioning that line in the second half of this year.
Finally construction on phase two is well underway and the steel frame of the building has gone up the first line in phase two is expected to begin production late in Q3 of next year, which is when we anticipate that we will need that capacity to support our growth.
Sixth record levels of customer support during Q2, we saw several major customers began the implementation of a very large scale fridge placement efforts, including the largest single project in our history, where we began a two months effort to place more than 2300 fridges at a single customer in late June .
Many of those fridges were upgrades second or third fridges, but that program demonstrates their interest and commitment and capturing very large shares of the fresh pet growing fresh pet food category in the quarter. We placed a total of 1300 85, new fridges with 313 of them being net new stores and the balance were up.
Grades second and third fridges in existing outlets for the year, we continue to expect to install more than 5000, new fridges, which will similarly be heavily skewed to stores, where we're placing second and third fridges by the end of the year, we expect to have more than 1.7 million cubic feet, a red refrigerated space at retail.
Seventh.
To strengthen our board in the past three months, we've made some excellent additions to our board in May we announced the appointment of Dave bigger the former chief supply chain officer for Conagra, and Campbell's soup to our board.
Dave brings highly relevant perishable food operations expertise to our business.
Two weeks ago, you announced that Dave West has joined our board Dave is the former CEO of Big Heart Pet, which is now part of J M Smucker and prior to that he was the CEO and CFO of Hershey and most recently he was the vice chairman simply good foods.
He brings deep pet industry expertise strong financial acumen, and an appreciation for the unique challenges of high growth businesses.
He will join our audit committee.
Finally, we announced a Walt George was selected as our New Board Chair Walters, replacing Charlie Norris, who just retired in accordance with the mandatory retirement policy, we put in place as part of our five year governance transformation plan that we announced in 2020.
Charlie Champions that plan, despite the knowledge that it would compel him to retire. This year, we are incredibly grateful to Charlie for his vision and support over so many years. He shepherded fresh pet from a company with $5 million in sales to one with a projected $750 million in sales this year and even personally guaranteed did the company debt to the company at.
This moment early in its life Walt.
Walt will step into the chairman steep seamlessly he's been on the board since the company went public in 2014 and has deep knowledge of both the company and the pet industry. While it began his career in operations at Frito lay but more importantly, he was a key executive at Hill's science diet drink its rapid growth from 185 million.
And net sales to $1.5 billion.
That gives him a unique insight into the challenges of building a large pet food brand and creating a supply network capable of supporting that growth wealth is also deeply committed to advancing the health of companion animals. As he serves as an officer on the board of the Morris Animal Foundation, which is one of the largest nonprofit organizations worldwide funding scientific.
That he used to advance the health and wellbeing of companion animals.
These board changes punctuate, a multi year effort to strengthen our company and better prepare us to pursue our mission to change the way people feed their pets forever ease.
These changes also demonstrate our commitment to evolving our board to meet our changing needs in parallel with a five year governance transformation plan that we initiated in 2020.
That plan and the board evolution are built on a philosophy that our boards governance practices and counsel they provide to our leadership team should match, the increasing scale and complexity of our business and be capable of addressing the emerging challenges we will encounter in the years ahead.
Our efforts to strengthen our human capital touched every part of our organization two years ago, We announced our investment in the fresh Pet Academy, which is stabilized and strengthened our production workforce dramatically, reducing turnover and building critical skills that have delivered the results we are sharing today.
Last September we announced several impactful changes to our management team and our field numerous roles. Since then including a new CFO , a new E V P of manufacturing and supply chain and new head of logistics, a new CIO, a new VP of manufacturing and numerous other important roles. Each of these was needed to both strengthen our team and support.
Our rapid growth.
Looking forward I expect that our efforts will deliver continued improvement in our operations and increasingly strong volume and household penetration based growth. Our team is very focused on the goals. We set for this year and it's delivering the kind of performance you should expect from US we believe that the strength and team we have built everywhere from our production floor to our finance team to our law.
16 to our marketing and sales team and more it's only scratching the surface of what is possible. We are very focused on delivering the 2027 goals. We laid out earlier this year and our fresh future plan and doing it as quickly as we can we are building momentum and our results to date show that we are on track to deliver those goals now let me turn it over.
Todd for the details on cute on the Q2 results.
Thank you Billy and good morning, everyone as Billy said in Q2, we continued the strong performance. We saw earlier this year and have raised our adjusted EBITDA guidance to reflect that strength let.
Let me break it down a bit further.
Net sales came in at $183 $3 million up 26% versus year ago, Our net price mix was up slightly more than 7% versus a year ago in the quarter and volume grew around 18%.
Nielsen measured dollar growth was up 23% versus a year ago in the quarter, but our growth in non measured channels was much stronger and added about two and a half points to our measured channels quote.
The growth was broad based across channels ranging from a low of 15% in the pet specialty channel to <unk> 25 per cent and X Aoc and greater than 50% in the unmeasured channels.
Adjusted gross margin was 39, 8% in Q2 110 basis points better than year ago, and above our base expectations.
Proved performance was due to a variety of factors, including improvements in the cost of inputs quality better pricing and a solid start up in earnest.
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 enhancement.
As we ramp up production and S and both our operations and then chicken processing, we will have some margin dilution due to the less than full utilization of our capacity and the cost of incremental staffing as we prepare to start up our next slide, but we will grow into that over time.
Increasing production and this will also make us a much more resilient company able to absorb the kinds of incidental supply issues that we struggled with in previous years and also lower our total logistics costs.
Total adjusted SG&A was 34, 9% of net sales down from 40% in the year ago quarter.
The biggest improvement was in logistics, where we gained 350 basis points due to strong fill rates.
Utilization of our second D C favorable lane rates and lower diesel costs.
We spent a healthy 14, 8% of net sales in media in the quarter, but this was below the 16, 4%. We spent in the year ago quarter. When we leaned into first half media to offset the impact of the February 2022, 12% price increase.
Year on year, However, media spending was up three and a half million dollars.
Balance of our SG&A costs were flat as a percentage of sales versus a year ago.
Adjusted EBITDA was $9 million in Q2 that is considerably better than the expectation. We had initially provided and was primarily due to the strong operating performance in Cogs and logistics. In addition to a modest shift in SG&A spending from Q2 to Q3.
For the year, we get delivered $12 million and adjusted EBITDA to date well ahead.
The initial expectations, we set at the outset of the year.
Capital spending in the quarter came in slightly below the most recent expectation at $45 million largely due to sequencing of some sizable expenses and earn its related to completion of the first production building a chicken processing facility in the early stages of construction of phase two there is no change.
And our outlook for capital spending this year, which remains at $240 million.
Our cash position is very strong for the remainder of the year. We expect interest income to interest expense largely offset each other we believe that we have adequate cash to fully fund our growth through 2024, and we will be free cash flow positive. In 2026. We 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 the first half, but the net but the net sales growth will increasingly be driven by volume growth versus pricing growth in Q1, we had a 14% benefit from pricing in Q in Q2 that dropped to 8%.
By Q4, it will be less than 5%, we expect the volume growth rate to continue to increase from the 18% we experienced in Q2 and be in the mid twenty's by year end.
We expect that Nielsen measured consumption growth, which is measured in dollars will continue we will continue to grow from the mid twenties, where it was in Q2 and from the upper Twenty's, where it is now to around 30% parking ended the year.
Our non measured channel growth rate will be even stronger as the business is growing quickly and accelerating.
The net sales growth rate versus year ago will be stronger in Q3, and Q4 as we had a very large trade inventory refill in the year ago. During Q4, while it's very difficult to determine the amount of that trade inventory. We felt we did have a gap of 10 points between the net sales growth rate and then Nielsen measured.
Both rates in Q4 of 2022, so we estimate that the trade inventory refill that occurred last year. It was in the $10 million to $15 million range.
Separately last year's Q3 had some supply interruptions due to the recall, we had and that will also make this year's year on year comparison, a bit more favorable in Q3 than in Q4.
We continue to see continuing improvement in our operating costs in Q3, as we built scale in earnest and continue the strong delivery, we have already seen in logistics and quality.
However, we will be adding staffing in the back half of the year in anticipation of meeting the demand we will experience in Q1 of 2024 and that will impact the adjusted gross margin. Despite the additional staffing we expect the second half will generate significant improvement in adjusted gross margin versus prior year with adjusted gross.
And in that 38% to 39% range.
In terms of inflation, we continue to see modest inflation some portions of our cost structure typically those costs with a heavy labor component, but we're also seeing relief on some other commodities that were badly constrained over the past year or two.
At this point over 90% of our costs are locked in for the year. So there is little upside opportunity or downside risks on input costs. This year.
It's just too early to tell what next year's total cost basket will look like.
In the back half of the year, we will also benefit from lower media spending as a percent of net sales than we had in the first half recall our plan for this year includes a first half second half split on media investment of two thirds versus one third.
Unlike last year, though we will have a meaningful media presence in Q4.
This translates to media spending in the back half of the year that we expect to be up around $15 million versus the second half of 2022.
Now, let me turn to our guidance for the balance of the year given our given outperformance for the first half we are raising our adjusted EBITDA guidance for the year to reflect some of that performance, but we will also leave us some room to absorb unexpected issues.
Thus, we are raising our adjusted EBITDA guidance to at least $55 million from at least $50 million with net sales continuing to build each quarter in Q4, historically being our lightest media investment period, we expect that approximately half of our full year adjusted EBITDA to occur in the fourth quarter.
We are reaffirming our net sales guidance of around $750 million for the year at this time the recent trends in volume and household penetration growth continue to support this plan and we remain confident in our ability to drive the acceleration in growth that our full year target implies.
Finally, I want to provide some perspective on how we are managing our capital spending and capacity expansion projects. Our goal is to support our long term growth plan without any need for further dilution.
We believe our plan and the principles I will outline we will achieve that goal. There are two key principles that are guiding our work number one.
We want to always have adequate capacity to meet consumer demand.
Shifting our customers over the past few years frustrated customers and consumers.
Further we endorse unacceptable cost increases in freight and quality when we struggled to keep up with demand.
So we always want to have enough capacity to meet demand that will require us to both plan ahead and also leave ourselves some capacity cushion. So that we can absorb unanticipated issues or more rapid growth.
Fortunately fresh pet demand growth is generally very reliable and predictable. So as we as we return to more normal timetables for construction and equipment lead times, we should be able to match supply and demand better than we have had for the past few years.
Number two.
Conversely, we do not want to commit to more capacity that we will need or sooner than we need ideally at any given point in time, we do not want to have more capacity than we might need and have large stranded costs consume our cash prematurely.
Our current plan.
Which has us committing to new lines about 18 months before we need them is consistent with this principle.
At this point, we are only committed to part of phase two and that takes our total capacity to almost one $5 billion.
We can comfortably we can comfortably pay for that cash with the cash we already have we have not made any commitments for the second part of it is phase two in its phase III or additional lines at kitchen South.
Only make those commitments when demand justifies it.
Further we do not want to get too far ahead of ourselves on any menu manufacturing technology. So we will have the ability to implement more efficient technologies as soon as they are ready to commercialize.
As you know we have a team of engineers and need scientists who have been working for several years, our ways to produce fresh cut more efficiently and have some exciting opportunities under development.
These principles make me very confident that we will be able to fulfill our long term growth expectations with the financial resources that we have and that that business will produce.
It also provides some housing pages optionality under lower growth scenarios, where we can accelerate free cash flow generation should the conditions present themselves.
That's certainly not our expectation, but it should give you some comfort about the downside risk of our plan.
I also want to be clear that each capital investment we make is with an expectation that we will deliver an after tax ROIC in the mid teens with.
The financial project projections, we laid out at Cagny allow us to achieve these ROIC targets.
In closing we are very happy with where we are at the mid point of the year. We continue to see strong revenue growth and are seeing the rebound in volume growth in household penetration that will enable us to deliver on our long term mission to change the way people nourish their pets.
The operations improvement plan, we put in place last September has now produced strong and consistent improvements that put us on track or ahead of the glide path needed to achieve our long term margin targets.
We have successfully started up our most significant capacity expansion effort S.
And expanded our capability to include on site chicken processing successfully.
And our customers are leaning into the fresh category by adding second and third fridges at a rapid rate.
Total at leaves us feeling very bullish about our future and our ability to deliver our long term goals.
That concludes our review we will now be glad to answer your questions and as a reminder, please focus your questions on the quarter in the company's operations.
Operator.
Thank you at this time well 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.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
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 Mark Astra Chen with Stifel. Please proceed with your question.
Hey, Thanks, Good morning, everybody good morning, I guess.
Ask about media spend and sort of how you're thinking about that.
In terms of the timing through the year I get that but in terms of what it's bringing in how you're spending it relative to a few years ago, it's still as efficient as it was in terms of the historic correlation.
Are you spending it versus a social media other sort of new age.
Our media purchases versus more traditional are you aiming at add new consumers is it aimed at existing users. How do you think about who you are bringing in how you think about the returns on the different cohorts of folks and maybe if you could give an update on how you're thinking about the cohorts in terms of repeat purchases as it relates to the media spend it would be helpful. Thank you.
Hey, Mark good morning.
So yeah.
I think historically, we've always been a heavily weighted towards the front half of the year from our from our total media spend and this year. We have we have actually more money budgeted towards a little bit more budgeted in total dollars towards the back half of this year. So for kind of where we are year to date.
If you look at our overall media plan and the timing correlation around household penetration.
We were waiting for an inflection point and we were hoping to see it in February and it really started happening in late February early March. So it was kind of timed similarly to what we've seen in the past if you look at the overall year, we're slightly above our historical.
On kind of dollars per consumer so it's cost us a little bit more to get consumers year to date, but if you look at the period since that inflection point, it's actually starting to perform well right back in the norm and I think this goes back to a much broader.
The piece that we're seeing on the business to be back in stock.
Distantly with full fridges, plus the media plus the innovation and all of those things working together is what's driving those efficiencies and I think we were still between pricing and not being consistently back in stock and really smoothed the supply chain until kind of kind of over the course of Q1 I think.
It was holding us back so we're really excited to see the media respond you know.
So it really kind of drive the household penetration and the thing I think we're most excited about is to be able to see that it's not just driving dollars that we're seeing really really great progress.
On a pounds and units front, which I think is pretty unique based on the category and also across CPG and you're asking a little bit about cohorts, you're asking about media mix.
The thing that I would probably celebrate as both our marketing team and our partners have done year. After year. After year have done an amazing job continuing to evolve our mix of media to make sure that it's productive as we spend more and as we get deeper into our total addressable market.
They've been able to do that consistently and I think it gives us incredible confidence and what we what the potential of the businesses over time, you'll see us more and more even before the writers' strike Youll see us more and more around sports we've been testing sports over the past year, they've been incredibly productive for us.
Pressing into some some new channels from a digital and you.
You know even kind of E. Commerce standpoint, that's been helpful to us and we are very very committed to be being I always prefer to it as media agnostic, meaning we want to do a lot of testing we want to figure out what's productive and that's where we're going to spend our dollars.
There is no dollars that we're spending that are for glory and fame.
It literally comes down to the strict pay out and I think that our analytics around that are best in class and best in the industry from a cohort repeat basis, one of the things that <unk> mentioned and I think in the script and also in the presentation. It's not only are we seeing overall penetration growth, but we're seeing really strong growth from the hippos.
I mean is it a high profit pet owning households are the people that tend to have either multiple dogs are bigger dogs and they spend more with us.
Being really strong performance from that group really nice consistent.
Or repeat purchases over time and we the way we always think about it is and we do a lot of work around ltvs like what's the long term value of these consumers and we are seeing that the long term value of other consumer groups continue to perform and continue to grow at.
At year end and year out and I think that's another kind of sign of a really kind of healthy fundamental business. So I know that you there were a lot of questions in there. So hopefully I hit on on the majority of them.
Yeah that was great. Thanks, Scott.
Thank you. Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.
Alright, guys good morning.
I was hoping maybe you can expand a little bit more on the unmeasured channel growth how strong that's been just some more color on what's driving that and how you see kind of that.
Doherty of that.
But the average growth.
Okay.
Hey, Peter good morning.
We have continued to see a really really nice expansion and when I say expansion just continued strong and leading growth in the non measured channels and those that centered around both club and E Commerce.
E Commerce is still on the smaller side of our business, but we have recognized in and I was just mentioning a lot about the marketing performance that we've seen.
We've been able to see incredible returns when we're very very careful and selective around some of the marketing that we've done around E. Commerce. So we're really proud of that the team has done a terrific job and we just love we love the progress there and we also see the opportunity in that area.
We've been a little bit of a laggard.
And pressing into that area, partially because we just haven't had the.
The inventory for a few years. So we really don't want to kind of compress into a new channel as much. So there's a lot of opportunity there and on the club on a club front.
We've been able to get distribution.
And we've come with a proposition that works for all the different partners. We think it works well for the consumer where 12 for the retailer and then works really well for us and we've continued to see really really nice expansion. There. The other thing that's I think important to note in those those unmeasured channels as we've done a pretty significant amount of work and been able to identify that the.
Consumers coming in on the non measured channels seem to be incremental to the kind of the overall my overall business. So we really really like that aspect of it.
That's great. Thanks, and then just my follow up would just be around pricing ability that you mentioned.
Hard to avoid more price increases just curious.
If you could comment on behaviors, you're seeing across your price points across your assortment.
And how you maybe how you feel about how that set right now are there any adjustments that you think you might want to make given demand elasticities across your portfolio.
Portfolio effects.
Yeah, we feel very good about where we're sitting right now obviously, the consumer had to digest, 27% pricing in 18 months and there are some bumps along the way, but we've come out the other side and we feel like we're in a really good place today the value relationship looks pretty good the only piece of.
Shift that we've seen is we've seen a little bit more of roles consumption than banks, but it's very small in the grand scheme of things for the most part the consumers say they just the pricing quite well, it's a little bit hard to see some of the all the details because our in stocks have been improving quite a bit since where we were a year ago and that masks some of the some of the <unk>.
Price sensitivity might see but overall, we feel like we're in a pretty good spot and frankly, we like where we sit because the commodities seem to be somewhat stable consumers who've adopted our pricing. So we feel like we've got a fairly clear smooth sailing for at least the foreseeable future at this point.
Great. Thanks, so much guys.
Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
Yes.
Thank you and good morning.
Good morning.
Can you just.
Unpack, a little bit and help.
Help us make sure we understand what drives the volume acceleration in the second half and just how much of the EBITDA guide is tied to that pick up as well.
I'll talk about the acceleration that Todd talked about the EBITDA pickup, but what's driving it is the consumer the digested the pricing and the in stock conditions look good we're getting lots of second fridge placements and the media is on air and working the way it.
Work historically as Scott outlined in the earlier question. So it is the basically the return to the business model getting to work without all the bumps and out of stocks and media not necessarily being on air So.
It's really back to business as usual I don't even talk about the.
Back half, it's pretty simple, it's really two aspects. One is as you know we spend heavily more heavily in media in the first half almost two thirds of our spend.
It happened in the first half versus second half so that that delta between first half and second half in absolute dollars as it becomes almost $25 million, that's a huge chunk of the EBITDA.
Second half waiting there and then just sequentially every quarter, we're anticipating revenue will be larger and we'll obviously get a variable margin off of that so those are really the two big pieces and we'll continue to see very favorable logistics costs I think we'll even do a little bit better in the second half than we did in the first half, but those those are.
The big buckets.
Okay. That's helpful and just I know you said, it's early for next year and that makes perfect sense as far as some of the input cost visibility, but can you give us a sense of timing of when you have your discussions to lock in chicken.
No I think you've contract that annually.
We've seen those prices have come off and just curious you know kind of when the sweet spot is for figuring out what you know.
When when would be locking in for next year and how far away that is.
Yeah, I mean, we officially lock in December but the discussions start as early as September or any sort of a dance that goes on between us and the chicken suppliers over that time period.
And it's always hard to say because as you think you know the chicken market can move fairly quickly the growing cycles on chickens is very short until supply and demand can expand and contract fairly quickly.
So we're optimistic we're encouraged I do think you have to remember that our price on chicken didn't go up as much as what you'd see in the publically reported information for chicken for the human market, but so it doesn't have as much room to go back down, but it but you know there is still a little bit of room. There. We don't know what we'll see when by the time, we get to the end of the year, though.
Okay, great. Thanks, so much.
Yeah.
Thank you. Our next question comes from the line of Brian .
Bryan Spillane with Bank of America. Please proceed with your question Hey, Thanks, operator, good morning, guys.
Good morning, Hey.
Hey, Billy if I could we got a couple of questions on this today and and so maybe if you could talk a little about about I think it's slide 30 on the <unk>.
In the presentation, where you lay.
Lay out that the volume growth or the volume chart and can you talk a little bit about.
How that looks like on a multiyear stack basis I think the question that a lot of people have kind of.
Come into my Inbox. This morning is just how much of the volume acceleration is basically just the comparisons and maybe some distribution still and just how you gain comfort with that and trying to look at it on some sort of stacked basis. So.
I guess net of an ask how much of how much of it is easy comps versus you know household penetration and growing growing again.
Yeah, I think the way to think about it is it what youre getting to is in the year ago period in the early part of the year you had a continually elevating price, which is driving a little bit on the price side and I'll just say on the power side on the pound, but once the prices stabilize both this year and in a year ago, the pound growth starts accelerating growth.
We're seeing on a week to week basis, we're seeing the Pound's go up very consistently which is a little bit unusual for this time of the year for us to be in the summer and see pound consumption increasing week to week. You know obviously, there is a little bit of shift as you go through the weeks of the month, but for the most part we've been seeing consistent growth on a sequential basis.
Throughout the summer and that's very very encouraging to us. So we're very bullish on the volume growth side of the story and we've obviously seen you know even more data than that is there, but what we can tell you is the volume growth continues to accelerate quite a bit. So let me I'll just expand on that a tiny bit. So if you take an average of Q4 and this is Nielsen.
<unk> and.
And you basically take that average and you look at where we are to date, we're up about.
12%.
<unk> kind of that Q4 average in house.
So it's been and it's been like Billy said it literally from February forward every couple of weeks, it's been consistently up so the compare I think you can you can look at comparable but I think if you look at where you were at the end of the year and you look at it versus the prior period and it's been consistently up since February and.
And we were every couple of weeks, we're setting new records in volume.
Okay and then thanks for that and then just a quick follow up to that I I don't maybe I missed this but I know you've got the Mega channel and in the slide deck, but.
You talked about non measured in some of the other channels. So do you have a composite.
<unk> of all channels kind of what consumption was in the quarter and kind of where it's running now. So if we were because we you know we can't see all of those the other two so just trying to get a sense of what the composite of all channels looks like consumption wise.
Yeah. So the unmeasured is still a relatively small part of our business. We quoted that volume was up 18% in the quarter and that is the composite that includes the measured and unmeasured. It's based on our shipment data. So we can use that to project it.
And if that's the acceleration that you've seen quarter to quarter 12 to 14 to 18 in this quarter.
And we're still seeing that continue to accelerate the big driver of that is the part that's in the unmeasured is as we said in the call is growing at a rate that's in excess of 50% and so while it's relatively small it is a expanding portion of the growth.
Okay. So we should look at the 18 volume as a.
Decent proxy for consumption, there's not like a lot of inventory or any kind of like the new distributions alright.
No that is that is based on looking at what we shipped and it's also looking at the Nielsen measured numbers as well as what we can track for the customers who are not included in the measured part and that's how you arrive at the 18, Okay cool thanks guys.
Yep.
Thank you. Our next question comes from the line of Bill Chappell with true Securities. Please proceed with your question.
Yeah.
Thanks.
Okay.
Hello.
Can you hear me.
Now we can.
Good morning.
Just a follow up on the pricing issue I understand youre comfortable with the pricing and consumers are increasingly cover for the pricing, but what happens if you see more of a dry premium competitors rolled back on price, where the price gaps get bigger because that team see I know, it's a different market a different product but that.
Seems to be.
I guess, our risks throughout the packaged food in general that we start to see as costs come back that theres more promotions in the marketplace. So any thoughts there.
Yeah. So bill I think you're right I think that the reality is.
Fresh fresh food fresh pet.
Its own specialized universe, but at the end of the day, they're still like it's still a food marketplace.
And there are certain I think people have to get consumers have to get comfortable with basically what the value proposition is of what we're offering versus what they can get and dry and I, but I do think that one of the one of the things that we've seen which has been really amazing as well.
We went up a very significant amount like you know Billy quoted in the script, almost 27% price increase and to see the the expansion that we're seeing in.
In penetration and buying rate.
It's extraordinary and I really think it demonstrates the specialness of what we what we brought to consumers.
I know I do think that if people start doing a significant amount of promotion I mean, it could have like a short term disruption, but I think that we've been able to work through this really well in the past, bringing what we brought to market now secondarily, we actually made a handful of decisions over the past literally six months to make sure.
Sure that we're continuing to offer the best value proposition, we possibly can and theres going to be some additional innovation that we're launching in the back of this year.
That will kind of address that and offer even better value to some consumers at parity type margins for US and then we will also offer some new innovation in the beginning of next year. So.
So I think to your point as we're cognizant of that we think we're at a really good place. We do know that there could be significant promotion going on in the category and we've tried to kind of forward thing.
What we could do in order to kind of offset some of that but.
But overall it has not we've seen a ton of activity in the past it has not slowed our progress.
Got it and I guess on the same vein for the follow up.
In the past you've done some.
Certain customers do you feel the need to expand that even further if customers are price sensitive or are you very comfortable where you stand.
So bill you cut out just a tiny bit he said something certain customers and I missed that and I think that was it.
Im sorry, Youre doing private label already for certain customers. So yeah yeah.
Yes, okay.
It was there was a need to expand that.
Got it okay, so actually well I'm glad you brought that up we have actually.
Yeah, we've actually.
Just on what we're seeing in the market and where we are and the progress that or the lack of progress. We've made with some of that private label, we're going to start like basically winding the majority.
Those offerings down we've shared that with most of our customers and there'll always be some discussion, but if you think about the program.
Where it is today, it's going to have it's going to be significantly less over the course of next year. So we'll tighten that up.
And when we have done the private label items, we've been able to to actually for the most part have margins that are I'd say acceptable, they're not they're definitely not leading by any means but they've been acceptable to us so but overall, we think we can better utilize.
Is that capacity towards some innovation and different things that we'd like to bring to market.
That's great to hear thanks, so much.
Thank you Bill.
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 question.
You guys have been able to reaccelerate volume growth in household penetration, but I just wanted to dig into the metrics you provided on slide 25. Your household penetration is up 10% on a 52 week basis, how did that compare to your plans coming into the year and can you just describe in detail for us more of your volume growth plans in the back half what you're looking.
Pour from household penetration from here.
Yeah. So it's a it's a really good question I think I had mentioned it in the very beginning when when Mark was asking about the advertising.
We actually got off to a slow start in January and February were a little bit slower than we would've liked to see from our household penetration standpoint, but actually and since March we've seen that reacceleration and it's actually.
We're basically back on track to what type of level of performance, we'd like to see in the cost to acquire a consumer so if you'd asked me that in March.
We thought it was starting to turn but it's now really turned into a really clear which way. The line is going which is up into the right which is terrific.
And we've actually posted some you know more recently a couple of really really good good weeks and that's on a rolling kind of 52, so it's a pretty big improvement.
And I think it's a lot of its behind again going we're back in stock we're back in stock consistently we've got really good innovation, we've got great a great media plan and I think we have epic creative right now that the creative and the advertising that we put in place seems to literally have top value and really be kind of well adopted and absorb.
By consumers in the marketplace.
So we feel like we're returning I think bill you used the term earlier, we're returning to the historical growth algorithm.
Got you that's Super helpful. And then I guess, Todd just to put a finer point on a question that was earlier do you think you can hit your revised EBITDA guidance. The tire now if you did not accelerate volume as you guys point and I'll pass it on thank you yeah. It looks I mean, so on.
No change in our full year outlook so.
We're still we're still holding to that $750 million level. So really no no change in what we think the volumes are going to be for the full year I would say.
That the Reacceleration happened a little bit later than we thought Q2 got off to it was it was.
Perfectly fine, but wasn't as strong as we had hoped but now that reacceleration is a bit steeper than we originally thought so where we are as we as we enter Q3.
We feel terrific about.
Again, no change to the full year guidance, we felt we could we could hit that just the curve is a little bit different than we originally anticipated.
Thank you best of luck going forward I'll pass it on.
Great. Thanks.
Thank you. Our next question comes from the line of refresh Creek with Oppenheimer. Please proceed with your question.
Good morning, and thanks for taking my question. So just going back to you on this facility and the ramp so far just curious any positive or negative surprises you continue to ramp the facility.
I guess I would say that is.
As you can imagine starting up a greenfield facility is always got ups and downs in it and we've had our fair share of ups and Downs has gone along what I'll tell you is where we are today is we feel very good about the progress we made on the wrong side of the business and it's going very very well and the chicken processing is doing very well the bank side of the business took a little bit longer and steeper to ramp up.
Then what we would have hoped we are now producing all the items in the lineup we feel very good about that but it took a little bit longer to get to the.
The production levels that we wanted in qualifying all the items and in part that's why we've begun to do the staffing for the line. The next bag line. So we gave ourselves a little bit more time to start that up we need that to be producing in Q1 of next year. So he started adding some staffing now so we can give ourselves a little bit more lead time on on the ramp up of the bag line, but other than that.
It's going well, we feel good about it as we said it's over 20% of our production at this point and for two line that's pretty darn good.
Great and then maybe just one follow up question for Todd So you've beaten our EBITDA two quarters or two quarters in a row by a significant margin just curious if you if we see more upside in the back half of the year would you consider reinvesting in the business or is there more of a bias to let it flow through to the bottom line.
Yes look we have its a very good question and we will.
We'll continue to evaluate the returns on our additional media if we choose to go do that but I just want to point out even though you know almost two thirds of the spending is first half weighted we have significantly more media in the second half this year than we do next year I mean, we're going to be up about 40%.
Year over year in Q3, and then as you know we spend very very little in Q4.
And we'll spend probably over $10 million in Q4. This year. So we have versus prior year and even in previous years, we haven't we haven't solid amount of media in the second half, but look if we if we see an opportunity to invest more we will definitely take a look at it but as you know over time, we'd like that media as a percent of net sales to come down a bit.
To allow us to get to our 2018% EBITDA margin target in 2027, but we will be smart if we see a great opportunity, we'll take advantage of it.
Great. Thank you.
Thank you. Our next question comes from the line of Jim <unk> with Stephens Inc. Please proceed with your question.
Hi, guys. Thanks for taking my question.
I think in your opening remarks, you had mentioned that there was a 2300 bridge commitment from a single customer.
If you can just give us some idea around what was the catalyst for them to make an order of that size is it something that they've been looking at now is the right time for them or just give us some insight into why that decision now.
Yeah. So.
I'll expand on that a bit.
Yeah.
I think this is something that's been coming for several years, we actually put a strategy in place probably about three or four years ago that would be called fresh first and the idea was how do we get consumers to think about filling their pet foods Bowl with fresh first and how to retail or start off the Io with fresh first because of the inherent benefits.
And our business model and I think what's happened is us talking about that and the progress that we've made on the consumer front and then finally being able to.
To build an N S have that customer come and visit there and see that we were going to have plenty of capacity they got really comfortable.
<unk> ahead in expanding in.
It was an existing customer.
Very large customer one of our top five customers and wanted to expand and double down and really put in second and third fridges and I think the core of it and I've heard this repeated time and time again over the past maybe two years.
As retailers are looking around going the benefits that fresh pet food brings to their store and their aisle or the same benefits. They see on the human side, where they see increased traffic new consumers strong margins.
A lot of dollars per consumer and really an overall quality halo impact for their entire aisle.
And I think they realize that and they realize that it's a real really advantageous for both their business and then the overall pet food aisle.
And they've made that decision along with lots of others and I think we're going to continue to see many retailers kind of kind of following behind them and add more and more fridges I mean, we we have we're going to have more.
We'll have more fridges.
Almost a year to date that we've had in some years.
So I think we're excited about the change in I guess it goes back to Todd's comment earlier.
<unk> got to make sure that retailers are confident we can fill those fridges and if they if we can and we have been able to then they're willing to put in more yeah.
It does amplify that point that this particular customer last July .
Sent a group starting with the buyer and the planner for the pet category all the way up to the CEO to annex to walk in and get convinced that we could even we could supply them and they spent better part of almost a full day with us and at the end. They came away convinced that we'd be able to supply them, we're willing to make that kind of commitment. So now that we've got good fill rates.
Can see the net adds is there and it has the capacity I would expect other customers to have the confidence to lean in and put more fridges in.
Okay, Great and then maybe as a follow on to that.
We think about the pet aisle in retailers and obviously it varies a little bit from store to store, but given that the majority of your new fridges are second and third bridges.
How much actual space is there and a lot of these I mean do they have to expand the pet aisles or is there enough in most retailers to accommodate a second and third bridge of the larger fringes.
Yes, so the.
Even in a grocery store you'll see.
Just in dog food, you'll see typically at least 40 48 40 to 48 feet.
So there's a there's that's just in the dog food section so that.
That that there's plenty of room and I think over time.
We're going to continue to take more and more of the calories in the category and and deliver kind of a really strong metrics to the retailer I think that there's plenty of opportunity and plenty of room for us to continue to expand for for many years to come.
Okay, great. Thanks, I'll pass it along.
Thank you. Our next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.
Yeah. Good morning, Thanks for the question.
The past 18 months or so perhaps even longer had been more oriented around building the capacity.
Enhancing fill rates and getting in stock levels back.
And I'm wondering to what extent you are now looking at it is innovation.
A key driver maybe both in terms of kind of filling out the kind of value equation for consumers.
Also.
Targeting maybe some specific segments.
<unk> been underrepresented in so the bigger question is I guess what are the.
What should we expect from an innovation perspective over the next 12 months to 24 months and how does that kind of compare to what perhaps we've seen over the past 12 months to 24, and then can you just provide a comment on your packaging restage I think you've talked about packaging rework that thats coming in some of the consumer test results around that thank you.
I'm going to give you just a topline comment that Scott can tell you about the innovation in the packaging, but I. The topline comment is that all the capacity that we've built out has largely been focused on the existing bags enrolls lines. Because we think the opportunity there is enormous and our projections are built upon on that having said that we have built flexibility into our system.
To be able to accommodate a little bit more innovation and if we get that that's gravy to us, but we can we think the opportunity on the bank's enrolls is absolutely enormous and so we're going to put the bulk of our attention and focus on continuing to maximize that opportunity having said that there was a lot of innovation opportunities and we've got a very innovative team. Scott can you just give you a little bit of color on that yeah.
So I'll start with a term that we use.
Internally, which is.
There is innovation than theirs renovation renovating some existing products, making simple improvements and then theres retirement.
And we want to make sure that we're retiring things that arent productive and productivity is on a pounds in but it's also something or things around margin too.
So we do think about it that way, we want to make sure that the innovation that we're coming with where we're making sure that we're making progress on margin over time, but the biggest single place that were I would say the impact of what I would call innovation, which is a very very big area is we're literally looking at innovation.
And also renovation on our existing lines and making sure that they are more productive.
That will give us the giant win in the future. So there's a both teams are oriented.
Constant stream of very smart innovation.
It's tight but also making sure that we're retiring some things that arent productive and innovating and using that word on our overall production processes to make grow margins.
Increased throughput.
And really get to overall, better and better process for the company, which will expand margins over time.
And the packaging restage packaging. Thank you sorry on the packaging restage.
It's going to launch in the beginning of end of Q3, beginning of Q4, you'll start to see a kind of kind of generally flow out.
It seems to be we don't do this.
We try and be very thoughtful about these things every time I mean, some companies every time, there's a new brand manager the new there's a new package.
And we're trying to it every three to five years.
We think what we're coming with is pretty pretty significant step change we test everything very very thoroughly quantitatively. The quantitative test results that we've done over time tend to be incredibly predictive. So we think that it will be something that will be a support and help for us next year.
And congratulations again to the sales team for their work in the expanded distribution.
Innovation team and that's broad that's very broad here on the work that they've done and then also the marketing team on not only the packaging I mentioned the advertising earlier.
Thanks.
Thank you. Our next question comes from the line of Connor <unk> with consumer Edge Research. Please proceed with your question.
Good morning, guys. Thanks for the question.
So just wondering have you observed any noticeable pack mix shift across your portfolio to the larger sizes. I mean, I know last year was a bit of an anomaly given the gas price that issue, but from what I recall in the summer months typically consumers tend to shift to larger pack sizes as I travel and such and if so how should we sort of think about that in the context of a toddler.
And gross margin.
Yeah, I don't think we've seen a whole lot of mix shift inside the slight shift toward so some larger sizes in the most recent periods, but it's not nothing that big the biggest difference is the comment I made earlier, which is there's a little bit more roles development this year than than what we would historically had which is it's obviously the more economical way to feed your dog.
Doug.
Even that is not very significant so in terms of the margin impact we don't have a huge difference between sizes. We do have a difference in margins between roles in bags and rolls tend to have.
Higher margins in the bags too.
Okay, Great. Thanks, and then also just Scott I just wanted to follow up on the comment you made earlier that consumers in non measured channels are highly incremental.
Is this kind of a result of your current media spend I mean, maybe is this just targeting those consumers or is this just a function of just a distribution.
Distribution rollout and maybe it didn't have any data you can share on sort of I guess, what as consumers look like maybe in terms of.
Income and whatnot or if there are any different than your other consumers that would be great.
Yeah, well I'll answer the back of the question first so there there really hasnt been much of a change in the type of consumer.
So there are similar household income of $80000 as kind of the average income.
It's amazingly like a lot of times people go Oh, well this must be for like very high income households, what it comes down to his relationship with pet and the importance that people put on nutrition and that's for themselves and their family. So we're seeing a similar type similar group of consumers.
We kind of historically have seen across the business.
Our belief is that there are certain consumers that tend to primarily shop for pet food and a specific store channel.
And as we've added some some of that distribution, whether it's through e-commerce or in some of the clubs.
Those consumers that are primarily shopping in that channel for pet food are now going Oh Wow. There is a new product here I've heard of it.
So I think the media has been encouraging them, but they haven't they haven't been making that trip in a more traditional grocery channel, which we have much broader distribution and so that's what we believe and that's what we're from everything that we've been able to see that their primary shopping trip is in that channel and now we're able to have them become <unk>.
Part of the fresh pet family.
Okay, great. Thanks for the color I appreciate it.
Yeah.
Thank you. Our final question. This morning comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.
Hi, How're you doing.
Welcome to your new home.
Yeah, that's pretty great.
I guess, one last question Todd I think you mentioned that.
You won't be committing capital to volume until you know for sure that the volumes. There is there any way to quantify what kind of volume growth youll need in 2024 to hit that threshold. It sounds like the next phase of NSS is pretty much youre going to youre going to do it.
But.
Is it 5% is it 10% 15 is there any way to put a number around it.
Around volume Rob.
Yes, how much volume growth in 2024.
Be the threshold to justify the next round of capital outlays.
Yes, so I mean as you know the algorithm for us for the next five years is to grow the top line on average 25% and for.
24.
We don't anticipate any additional pricing so we'll have a little bit of a wrap around on that last price increase that we took in February but for 24, it's going to be almost all volume so close to 25%.
The way, we're seeing it right now will be volume growth $4 24, So thats why bill.
Bill you made some earlier comments, we're starting to get that.
Second bag line.
Staff sooner rather than later, because we're seeing acceleration right now and again, we are anticipating a lot of volume growth over the next couple of years.
Okay.
Please go.
If I could add to it is we already have as we said in the comments phase two is under construction, we split phase two into two pieces. So there are two lines in the first part of phase two.
Recall, though we also have some other lines in the system that are not fully utilized right. Now. So the reality is we said is when the projects that are already committed we have up to almost $1 5 billion capacity. So all you have to do is look at that and say, that's what's committed and how long will take us to grow into that and then recognize that we need anything beyond that.
I mean 18 months lead time to do it at a minimum in terms of whether it's a building or align but you need about 18 months.
Okay, well I guess, that's kind of.
The nature of the question like if volume is only say 15% in 2024.
What does that mean for the capital allocations that you've put out there.
Is there enough flex in the system to the tamp it down if in an event like that.
Yes, theres two ways to tamper down one is we will slow capex spending you know, we're obviously, we're not anticipating that we're going to slow.
Slower to that degree, but for some reason we did we would absolutely slow down our capex spending.
For the next year the second one is.
We have flexibility on how many of these lines that we would staff. So if we're not seeing the growth that we're anticipating.
We will not staff all of those lines.
But again from what we're seeing right now we anticipate very very strong growth.
Yes, I agree alright, thank you very much.
Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Steele for any final comments.
Great. Thank you and thanks, everyone for your interest and your time I'll end with a thought for you from the author Karen Davis and she said a dog can express more with his tail in minutes than an owner can express with his tongue in hours to which I would respond feed them fresh pet in their tail won't stop talking until those time for the next meal. Thanks, everyone. Thanks for your interest.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.