Q3 2023 Freshpet Inc Earnings Call
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Greetings and welcome to the fresh pet third 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. Getz Paluch Investor Relations.
Thank you you may begin.
Thank you good morning, and welcome to fresh Pet's third 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 for Q&A.
Before we begin please remember that during the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements.
Please refer to the Companys annual report on Form 10-K as filed with the heat in 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 and adjusted EBITDA among others. While the company believes these non-GAAP financial measures provide useful information for investors presentation of this information is not intended to be considered in isolation or as a substitute for the financial information.
Presented in accordance with GAAP.
Please refer to today's press release for how management defines such non-GAAP measures a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can 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 a presentation can be found on the company's investor website.
In his commentary will not specifically walk through the presentation on the call, but rather it's a summary of the results and guidance. They will discuss today with that I'd like to turn the call over to Billy Cyr Chief Executive Officer.
Thank you, Jeff and good morning, everyone.
The message I would like you to take away from today's call is that the third quarter results show that the fresh cut business is delivering on its promises and potential and as a result, we were off to a fast start towards our 2027 goals.
At the beginning of the year, we laid out our new fresh future long term plan that called for 25% annual top line growth, resulting in $1 $8 billion in net sales in 2027 and strong margin improvement with the ultimate goal of delivering 18% adjusted EBITDA margins in 2027.
For 2023, the first year of that plan, we committed to continuing our strong track record of net sales growth while simultaneously fixing the operating issues that were preventing us from generating the margins that we know are attainable in this business we.
We are delivering on that commitment and exceeding many of the targets we set.
He is the head of the pace required to deliver our 2027 goals.
This increases our confidence in the capabilities. We are building the strategies, we are employing in our ability to deliver our long term goals.
In Q3, we delivered both topline and bottom line growth ahead of expectations for the quarter.
We delivered 33% net sales growth, bringing our year to date net sales growth, 28%. While we also delivered a step change in our profitability due to strong operational improvements.
As a result of that progress, we're raising both our net sales and adjusted EBITDA guidance for the year.
We believe our fast start towards our 2027 goals is largely due to the strengthened organization capability, we have built and the strength of the fresh pack consumer proposition.
The team we've built is delivering improvements in our key focus areas of quality logistics and input cost at a rate that has exceeded our projections and which enabled us to deliver a 42% adjusted gross margin in the quarter.
Our progress in logistics has been even more significant and impressive.
This is a true testament to the quality and depth of our team that is spearheading these projects and we couldn't be more proud of this measurable progress.
Our net sales growth has also been impressive and is a good demonstration of how resilient. The fresh paper brand is even in the face of higher pricing Q.
Q3 was our fourth consecutive quarter accelerating volume growth and our 23% volume growth in the quarter in combination with our typical mix improvement provides added confidence that we can continue to deliver the mid twenty's net sales growth CAGR needed to support our long term algorithm, even without the benefit of pricing.
Even more encouraging is the increasing rate of household penetration growth that we've seen.
But it will take some time for the 52 week household penetration measure show the low Twenty's household penetration growth. We have seen previously the 13th week measure is already approaching that rate of growth. It is just a matter of time for the long term measures to catch up.
Do you think that will happen by mid year next year.
While we were off to a great start. We're also mindful that we still have a lot of work to do to achieve our 2027 calls, particularly our margin goals.
Our adjusted gross margin is still 500 basis points below our long term goal and our adjusted EBITDA margin is also well below where it needs to be we.
We need to stay focused on improving our operational performance, while simultaneously, adding capacity to keep up with the strong growth we expect to deliver.
I want to provide a few additional highlights from the quarter and then we'll turn it over to Todd to provide the key details and our updated outlook for the balance of the year.
First net sales gross.
Net sales growth in the quarter was particularly strong and ahead of our expectations. It was largely due to strong 23% volume growth that in combination with typical mix improvements is equal to our long term 25% growth target.
This growth was due to continued household penetration growth and even stronger growth in the number of heavy super heavy users, what we call kit Bose.
So as hippos account for 88% of our volume today.
The number of hit both in the fresh pet franchise grew 25% in the past year and Theyre buying rate grew 6% demonstrating the disproportional impact that these targeted consumers have on our growth.
So saw particularly strong growth in the unmeasured channels such as club.
Net sales up more than 100% in the unmeasured portion of that channel.
What's particularly exciting is that 65% of the households, who buy fresh pet in that channel are completely new to fresh pack and they buy in large quantities.
The strong growth in the unmeasured channels more than offset the slower growth you've been experiencing in the pet specialty channel.
Second fridge placements, we placed 4464, new upgraded in second or third fridges year to date, a record for us by a large margin.
20% of all of our 26385 stores now have multiple fridges.
On a pace. It is well ahead of our initial commitment to place 5000 purchase this year and already have the $1 7 billion cubic feet at retail that we projected for the year.
This is a testament to retailers' belief in fresh pet, it's a scalable and innovative category leader and that we represent a significant growth opportunity for that.
Third e-commerce.
We continue to see strong growth in the ecommerce channel, which we define as curbside pickup delivery and D. T C E.
E Commerce now accounts for 95% of our total volume and 88% of that volume goes through our fridge network either via curbside pickup for our store based delivery option against the card, which grew 48% versus year ago.
E Commerce sales are up 62% versus a year ago, and we continue to believe this will grow as consumers increasingly adopt new and convenient grocery pickup and delivery services.
Fourth innovation.
We launched our large stock offering and a limited number of stores earlier this year and it is off to a fast start with its dollar velocity within our top 10 items, where it is in distribution.
These strong results and the ability of this item to expand our reach into larger dogs, we expect to expand distribution of this product next year.
Additionally, we launched fresh pet complete nutrition roles in October.
Nutrition offers the fresh pet experience had a good entry point value.
We expect it to be in more than 9500 stores by the end of the year.
We think that this will make fresh pack more accessible interested but more value conscious consumers.
Fifth quality logistics and input costs as we told you at the beginning of the year. These costs would be our key focus areas as we sought to improve our operations.
We're making good progress.
In the quarter, we improve the collective total of these costs by 780 basis points versus year ago.
Within that our quality costs were 190 basis points better than a year ago.
Our progress in logistics has been exceptional improving by 540 basis points versus year ago.
While we are benefiting from the macro environment, which has created less demand for trucking capacity and lower fuel cost and last year. We believe that only about one third of our improvement is due to those factors, whereas the remaining two thirds is due to actions we have directly taken.
For perspective, despite shipping 23% more pounds of product in Q3 of this year than in Q3 last year. The total number of miles of freight we paid for was down by 28%.
This was due to higher fill rates larger order size. After our June implementation, a bracket pricing and the ramp up our second D C.
And we have leveraged our increasing scale to get lower lane rates relative to the market than we have gotten previously.
This is a clear demonstration of the incremental capability, we have built in logistics over the past year.
And sex capacity, we've successfully added incremental staffing at all three production sites over the past 90 days and that is delivering the necessary capacity to support our current rate of growth and is positioning us well to meet the demand we anticipate in Q1 of 2024.
Further the second bag line in N. S has begun commissioning and is on track to begin producing saleable product by the end of the year construction.
Construction of phase two and N. S is on track or slightly ahead of schedule and that will enable us to begin producing roles in the first line in phase two by the end of Q3 of next year.
In total we believe we will have adequate capacity to support our near term growth that underpins, our 2027 algorithm and will be well positioned to support growth going forward.
In summary, we believe we are making very good progress and remain very bullish on the year and our long term prospects.
I would like to end my comments with some thoughts on the overall pet food category.
Theres been lots of discussion lately about the impact on household budgets and the influence on category volumes, given higher category pricing and a wide variety of macroeconomic factors such as the resumption of student loan payments interest rates and inflation.
Clearly the results we presented today suggests that an increasing number of consumers are still willing to pay for high quality pet foods and demand for those types of products is growing.
We're seeing strong growth across all age groups and income cohorts and we believe that the most important variables in determining what kind of pet food you feed your dog or not income or age, but how important your dog is to you and how much you focus on their health and wellbeing.
Cost of feed fresh pet is only about $2 per day for the average 30 pound dog.
That expense for high quality pet food has shown over time to be amongst the last things that someone cuts from their household budget when times are tight.
When you contrast, our performance with a wider CPG narrative about consumer trade down that is occurring. This suggests that there is a bifurcation of the category to the high end thriving and downward pressure less differentiated brands.
It is true that our volume is becoming increasingly concentrated amongst our heaviest users hit Bose.
Also happen to be our fastest growing group of users, we view that trend to be favorable demonstrating high levels of satisfaction and making our business increasingly main meal instead of topping or mixer.
Now have almost 4 million hit Bose and our franchise double the number we had three years ago and they are consuming an average of $235 a fresh pad per year.
That group has grown 25% over the past year and they now account for 88% of our business.
Within the heavy user Hippo group, we are a subset of about 250000 users out the size of some of the D. T C brand franchises.
By more than $1000 per year account for about 25% of our total volume.
That group has grown more than 50% over the past year.
We described the consumer behavior. We are seeing is fresh cut is becoming increasingly mainstream and main meal, where.
We are growing our total franchise across all ages and income cohorts. Thus, we are becoming more mainstream and.
And we are increasingly driving higher and higher buying rates must be coming more main meal is creates a strong loyal and very valuable consumer franchise.
This behavior is consistent with a long term trend towards the humanization of pets and consumer interest and feeding their pets, the highest quality food that has driven the premiums nation of the pet food market for the last two decades now.
Nothing in the data that we see suggest that this trend is slowing and in fact, we believe that the next generation of users is even more interested in providing the highest quality of care for their pets and concerned about the quality of food. They feed every member of their family. This is a fundamental trend that we've discussed over the years, but it is being tested.
Amid this period of economic uncertainty and the resiliency that we see is extremely encouraging for the future of fresh pad.
With this backdrop, we believe that fresh pet has the potential to become a very large brand and a very large and growing category and we are taking the necessary steps to ensure that we realize that potential.
Now, let me turn it over to Todd for the details on the Q3 results.
Thank you Billy and good morning, everyone as Billy said in Q3, we continued the strong performance. We saw earlier this year and have raised our net sales and adjusted EBITDA guidance to reflect that strength.
Let me break it down a bit further.
Net sales came in at $206 million up 33% versus year ago.
Our net price mix was up more than 95% versus a year ago in the quarter and volume measured in pounds grew 23%.
The price mix was positively impacted by the two price increases we took in February and last September totaling seven 5%.
The mixed benefit, which we have consistently seen over time as consumers migrate to higher priced items and our lineup was slightly more than two points.
Total Nielsen measured dollar growth was 28% versus a year ago in the quarter, but.
But our growth in non measured channels was much stronger and added almost four points to our measured channel growth.
Which also has been a consistent trend as of late.
The growth was broad based across channels ranging from from a low of 12% in the pet specialty channel to 30% in ALC and greater than 100% in the unmeasured channels.
Adjusted gross margin was 42% in Q3, 570 basis points better than a year ago, and well above our base expectation.
This improved performance was due to a variety of factors, including improvements in the input cost and quality.
So the pricing we took in February and increasing fixed cost leverage and Anna.
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, particularly as we grow into the scale of the operation.
Total SG&A was 28, 6% of net sales down from 32, 2% in the year ago quarter. The biggest improvement wasn't with just where we gained 540 basis points.
Spent 95% of net sales on media in the quarter, which represents an increase of $5 million versus a year ago.
We did have some unfavorable <unk> and SG&A as we true up our bonus accrual to reflect this year's improved performance.
Treating our bonus expense versus a year ago by 170 basis points.
Adjusted EBITDA was $23 $2 million in Q3 that is considerably better than the expectation. We had initially provided it was primarily due to the strong operating performance in Cogs and logistics.
The better than planned net sales.
For the year, we have delivered $35 $2 million and adjusted EBITDA to date.
All ahead of the initial expectations, we set at the outset of the year.
Capital spending in the quarter was $60 million, there's no change in our outlook for capital spending this year, which remains at $240 million.
We generated around $39 million in operating cash flow year to date.
Improvement of almost $93 million versus year ago.
As a result, our cash position is very strong with $338 million in cash on hand at the end of the quarter.
For the remainder of the year, we expect interest income and interest expense to largely offset each other.
We believe that we have adequate 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.
Curves.
As we look ahead to closing out 2023, we expect to continue the strong consumption growth. We demonstrated in Q3 with it now but the net sales growth will be impacted by the large trade inventory refill we completed in Q4 of last year.
We believe that trade inventory refill totaled around $10 million to $15 million in Q4, 2022, and we will not have any trade inventory refill in Q4 of this year.
Thus, we are expecting net sales growth to be in the low twenties, while consumption growth will remain in the high <unk>.
We will continue to see an increasing rate of growth coming from unmeasured channels at the club business is doing extremely well.
We will be losing the year on year benefit of the two 7% price increase we took last September.
We will only have five points of benefit from pricing versus year ago in the fourth quarter.
Thus volume and continued mix improvements will be the primary drivers of our net sales growth. The trends. We are seeing now are already supported other volume and mix growth, we need to deliver our net sales goal for the year and starting next year strongly.
We expect to see continuing improvement in our operating cost in Q4, as we build scale.
And continue the strong delivery, we have already seen in our logistics and quality. However.
However, we have added manufacturing staff in anticipation of meeting the demand we will experience in Q1 of 2024 and that will impact the adjusted gross margin in Q4, we will also incur some startup costs for the second bank line.
As a result, we expect fourth quarter adjusted gross margin will be slightly below Q3, but well above the year ago margin of 33%.
In the fourth quarter, we will have a sizable immediate dollar investment versus that you've been minimis investment in the year ago and that investment will help us get off to a fast start in 2024.
However, the rate of media spending in Q4 will be below the level, we had in the first half of the year, providing some incremental margin benefit.
Now, let me turn to our guidance for the balance of the year.
Given the strong performance to date and what we have seen of Q4. So far we believe it is appropriate to raise our guidance to reflect the higher net sales and better than anticipated performance on adjusted gross margin and logistic.
Now, let me turn to our guidance for the balance of the year given the strong performance to date and what we have seen of Q4. So far we believe it is appropriate to raise our guidance to reflect the higher net sales and better than anticipated performance on adjusted gross margin and logistics Scott.
Thus, we are raising our adjusted EBITDA guidance to around $62 million from at least $55 million.
And we are raising our net sales guidance by $5 million.
$755 million.
We are not ready to give formal guidance for 2024, yet. So you should expect us to continue to focus our strategic planning on delivering against our 2027 targets that call for 25% compound growth.
And then increasing rate of margin and profit growth.
We will have fewer startup costs next year, and we'll continue to capture scale benefits and quality improvements in our manufacturing facilities.
<unk> and further improvement in our adjusted gross margin next year.
We will continue to capture scale and efficiency benefits in SG&A.
It is important to note that our priority will remain on restoring the profitability of the business, while continuing to deliver the outsized growth.
Investors have come to expect from us.
However at the scale, we have now achieved over delivery of our growth rate has consequences that we must avoid to achieve our margin targets.
It can significantly impact our ability to meet demand.
Our ability to design construct and start up new lines.
And stretch our balance sheet in this regard we are being very thoughtful in managing our growth at levels that are consistent with our long term target. Our goal is to always have adequate capacity to meet our anticipated demand and not.
Not much more than that so that we can live within our within our existing resources.
Our planning process for adding new capacity has multiple checkpoints to before we are fully committed to the cost of new capacity we.
We are constantly updating our demand forecast and only only commit to new increments of capacity when it becomes apparent that we will need them.
Because of the infrastructure, we have already built in.
Kitchen, South in Pennsylvania, all of our current projects are within the scope of the buildings and sites that we have already developed in the end its phase III building that will be completed by mid next year.
We can add four lines in that space do more lines in the existing space that kitchen, south and are developing a plan to install another line and storage space in kitchens, two in Pennsylvania.
Effectively that means that we are only making capital commitments 18 months out from when we need the capacity at this point it will not have to invest in new buildings or site infrastructure beyond end of phase II.
The next year or two and we are only adding staffing 90 days from when we need it we believe that gives us flexibility to scale our capacity well.
Simultaneously managing our cash very closely for the next few years.
Our fast start towards our 2020 setting goals will also provide some added strength and flexibility on our balance sheet.
With good capital spending discipline improved margins and better operating cash flow. We remain convinced that we will have ample liquidity to meet our needs for 'twenty three 'twenty four.
We expect to require a small amount of traditional debt financing in 2025, and we will have more than enough earnings power to support that.
We continue to believe we will be cash flow positive in 2026.
In closing we are very happy with the way the year is turning out.
The management changes that we made in September 2022, and an increased focus on our operational improvement are apparent.
They have put US ahead of the glide path that we need to deliver our 2027 goals, giving us both them and us optimism that we can meet or beat those goals and also some cushion to absorb any short term issues along the way.
As we end 2023 and head into 2024, we are in a much stronger position.
We were one year ago.
And this is up and running including the chicken processing operation our operating efficiency has improved dramatically.
Solid evidence of continuing continuing improvement almost everyday.
Our customers have added a record number of new fridges that are amplifying our advertising investment.
Household penetration is growing nicely and our hit those are growing even faster.
And fresh pad is becoming more mainstream and more main meal.
All of that plus the additions we have made to our team is the recipe for our long term success.
We are very bullish about our future and our ability to deliver our long term goals.
That concludes our overview, 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 we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we ask that participants limit themselves to one question and one follow up one.
One moment, please while we poll for questions.
Thank you. Our first question is from Ken Goldman with Jpmorgan. Please proceed with your question.
Good morning, Thank you.
I know you're not talking specifically about 2024, yet, but you did bring up the idea that I think you're generally aiming for 25% CAGR over the next.
A few years.
Want to make sure.
Is the messaging for next year, if there is messaging at all.
You're on target for that 25% ish CAGR in general, but youre going to do if things come in as expected above 25% in 2023. So maybe you can still do below 25% in 'twenty four and still get to that number I'm just trying to get a sense. If there's any kind of underlying messaging in there or if I'm reading too much into that.
I think youre reading, a little little much into that Ken the message is that our current run rate of volume and mix, which support 25% growth. Our long term algorithm calls for 25% growth and so we fully expect to deliver 25% growth next year based on what we can see today.
We feel very good about the momentum in the business. We're seeing good consumption. There is no reason for us to think that's not going to be part of the plan.
Thank you and then just a quick follow up and if you said this on the call I missed it but.
Todd how youre there youre into November presumably some discussions with vendors have been underway. What's your updated estimate for Cogs inflation next year. I think you were roughly thinking on an early basis about low single digit last quarter.
Yes.
It's too early to tell chicken pricing is the biggest component we will know that in about the next months.
I mentioned on the call, where we're very confident we will have gross margin expansion next year don't know exactly what that looks like obviously, we'll give you more color.
When we report Q4, well look I think it's going to be I think it's going to be flattish right now things are looking pretty good.
I think we'll have some nice leverage from fixed cost we think the quality cost will continue to see a decline feel great about logistics. So very confident about some level of gross margin expansion next year, it's really going to be dependent on what those final input costs are.
Thank you so much.
Thanks, Ken.
Thank you. Our next question is from Mark Astrachan with Stifel.
Stifel. Please proceed with your question.
Yes, thanks, and good morning, everybody.
Hum.
I guess, maybe just to start on.
On the on track and on the mix.
Got.
Could you maybe talk a bit about how how much line of sight you have on each of those can you talk about mix being a similar sort of contributor historically I don't recall a specific breakout previously sort of curious.
Why and how we think about and how much ability do you have to manipulate that higher with innovation and on the Amtrak DS four points or so of contribution was a little bit more than in the first half.
How do you think about that on a go forward basis is there opportunity for that to sustain into 24. Thank you.
Well, Hey, Mark it's Scott.
So historically, what we've seen is mix has definitely been a contributor are typically around three to maybe four points per year. So you kind of add that to our volume and thats. The majority of what we're seeing.
And that's kind of been historical we're starting to see it again this year and then the other thing that we're kind of starting to obviously see a ton of expansion and is the all the non measured channels and part of that is club, but part of Thats also the online piece too.
Okay, Let me just add to it one of the reasons why it hasnt been as much of a discussion over the last couple of years is because our mix is oftentimes been dictated by capacity.
And this year our mix you know we have much more of the consumer available to choose on their own you know historically, our freshmen that kitchen product has been our fastest growing part of our lineup and it's the most premium part of our lineup and we frankly finally have good in stocks in good supply of that and so the consumer is able to naturally migrate up through the platform or through the brand franchise as they have historically.
And then I'll add one more piece to it is we as Billy mentioned in the call we introduced some innovation call.
Complete nutrition.
And that's we think a great opportunity to bring additional people in <unk>.
Think that that's going to help us with overall buy rate over the over time and then we're also starting to kind of introduce mixed or bulk cases into the portfolio.
So as we see that we will see probably buy rate expansion with that and I think that's going to help us with kind of overall consumption.
Spansion and mix.
And in addition actually to penetration.
Got it and maybe related to the last piece on just the increments already sort of building on what you talked about in the hip those.
Do you think about the recruitment and how many non users are there out there to continue driving growth and what do you know about in terms of.
Competition.
Competition.
Income and generations in terms of users.
Yeah, I mean first of all Youll see in the presentation, we attach that the growth has been fairly broad based the obviously the group that has the highest likelihood of being interested in fresh pet skews younger so the millennials and the Gen Z and that's where we're making the most progress and I think millennials and Gen Z today account for about 50%.
The dog ownership in the U S and it's obviously, where the growth is coming from going forward and that's where our proposition really resonates I think thats. The number I recall is that Gen. Z is twice as likely to choose fresh pet as a baby Boomer is so we think that fundamentally over the long haul there's a very good demographic.
Tailwind, that's going to help us with us and we would expect to see that so we would expect to see that cohort grow much more quickly.
Thank you.
Okay.
Thank you. Our next question is from <unk> <unk> with Oppenheimer. Please proceed with your question.
Good morning, and thanks for taking my question. So in regard in regards to your marketing efforts just curious how how the responses to your marketing and then as you look towards next year, just any initial thoughts on the plan for span whether you plan to be consistent consistent 11% or just any thoughts there as well.
So I'll answer the response to the marketing piece and I'll turn it over to Todd.
The planned spend so basically.
We've been able to consistently refresh the advertising over time, and the marketing and the communication and we really have been able to see incredible responses to the market that we put in place we see penetration it really kind of pushing penetration really nice consistent growth over time.
An expansion of the portfolio and bring it as Billy mentioned in the call to this really we're mainstreaming the brand of mainstreaming the idea of fresh pet food.
And continuing to kind of deliver on that concept.
And as Todd I'll, let you talk a little about planned spend yes, I mean, it's still a little bit early on in the planning cycle for next year.
<unk> will largely grow with sales.
Budget for for the year that will bring us our media spend over $100 million for 24 Thats. The way it plays out which obviously, we're really excited about and at that point, we'll be able to start bringing that number as a percent of sales down over the next few years as you know that target the goal to get from 11.
Or sent to about 9% and I'm really confident we will have enough in our media budget to be able to do that in the out years, but right now about growing with sales.
Great and then maybe just one follow up question. So your operating cash flows were very strong year to date I think you guys at one point that you could do 30% to 35% are already about that.
Any updated expectations on how to think about that line for the balance of the year yes.
Yes, I mean, I think we will be obviously depends on.
Final working capital we did we had very strong working capital in Q3, I think a little bit of that was timing, but we're doing a much better job there.
Anticipating we can do at least $50 million fee for the year and look this is one of the bright spots I think not only the net sales and adjusted EBITDA, but the the operating cash flow and the discipline that the team has put in in the last year has been really impressive. So we're off to a really good start.
Great. Thank you I'll pass it along.
Thank you.
Thank you. Our next question is from Peter Benedict with Baird. Please proceed with your question.
Hi, guys good morning.
So first question just on the fridge placement momentum, obviously, a big year.
Here in 'twenty, three and just how you're thinking about that as we move maybe into 'twenty for not just kind of the new placements, but also the second and third.
Fridge placements just how are you thinking about about that.
Well, we've made incredible progress this year I mean, it's a banner year really a record year for fridge placements and it's not just first fridges, we're doing well with the second and in some cases, even third fridges and we continue to see that as being a really big piece of our overall kind of construct in the future, where we're adding a second fridges into.
Many of the high volume stores, we expand out when we do that we expand out on some of the current portfolio and things that that we have kind of a lower stock and lower inventory on sometimes in holding power over the weekend, but it also allows us to bring some innovation into the market. So we really think that's a really important and.
It'll piece.
Going forward, we're not ready to put up any numbers, but I would for 2024 on fridges, but I would expect a return to more historical levels and I think over the next year and maybe even two to three years, we will have the benefit of what we were able to do in 2023 and kind of give us an incredible platform to build out the <unk>.
And the entire company and the brand.
No that makes sense and I guess, a follow up to that Scott would be yes, I mean, not all new stores are created equal.
And you have got a lot of momentum with the with the club channel just curious kind of the durability of that the duration of kind of expanded presence within club.
And anything else you would say in terms of.
Partners or channels that you're maybe not.
We're not fully penetrated at this point thank you.
Sure so.
Look this is the first year that we've had significant expansion in club.
We've made great progress, we're going to get the benefit of that for multiple years.
Mike constant joke for the last decade is the best time to put a fresh pet Virgin as yesterday, because every single year delivers on same store sales increases in growth. So I think that will get the benefit of the club channel and it will be oversized or super size to some extent.
So on an average fridge might go up if it goes up 15 points or whatever on a same store sales basis, if that goes up 15%.
After a year it'll be kind of at that higher rate that a club typically will sell so we like that the other thing is we are I mean, it's very obvious out there, but we have zero Sam's clubs. We think over time. This is a really tremendous opportunity for us to start developing a partnership with Sam's and.
And seeing and deliver a different type of proposition that is appropriate to their their customer.
And really see a great opportunity for expansion over time at Sam's.
Terrific. Thanks, so much.
Okay.
Thank you. Our next question is from Jason English with Goldman Sachs. Please proceed with your question.
Okay.
Hey, folks thanks for Slotting man I'm going to take us back to the top of the first two lines of question, which I think we're all about trying to get confidence in the consensus estimate for 25% growth next year.
You mentioned that Youre confident based on everything you see.
It's a little harder for us to get confidence because we don't see the <unk> contribution.
The mix, we did see in the Nielsen data, which is tracking below and we know the big box Pat is not particularly strong.
So coming back on two points that have already been addressed I want to make sure we come back and hit them again, because I think they're really important the mixed component, obviously, a nice contributor youre launching a lower a lower price per pound product.
Shouldnt, we expect some of your consumers to opt in for that and mixed therefore to turn into a headwind.
Question, One and then question two.
I am sorry, I was distracted there was other news on the tape and I am I know Mark asked this but.
The 400 basis points Costco contribution.
Youre going to start to cycle to build out next year and getting the same number of stores as you've got this year, just net neutralizes that ma'am.
Doesn't continue to add incremental growth over and above so what's the source of the incremental growth like how do we keep that incremental 400 basis points comment.
Let me, let me take that.
Got it there so first of all on the on the Costco part, we're still not in the full Costco collection of stores I think at the end of the quarter. We earned something like 370 of the Costco as there's like 550. So we still have a long runway of new stores and then each of the stores that were in grows at a very rapid rate.
And they're relatively early in their life. So I would expect that trend with with Costco to continue for quite some time.
And as Scott just mentioned.
We are not yet in Santos, but thats certainly becomes another opportunity for us when when they decide that that's a play that they like to make on the mix part, yes, we do expect to see that some number of consumers will migrate to the to the new complete nutrition product, but what we've seen so far is that that is more.
And then offset by the migration up the franchise, especially as we've gotten complete distribution on our fresh from the kitchen product and some of the other more premium products. We've added to the lineup. So on balance. We believe that there is continued to be mix gains rather than a mixed headwind.
Our data and we obviously showed you the data through the end of September we had the complete nutrition product in the market in October we've seen what the sales look like and we still feel very comfortable that it is not dilutive.
That's good stuff I appreciate that and by the way congrats on all the operational improvement I should open with that because you are obviously, making great strides and I want to make sure those are recognized.
And it's great to see and then driving margin so sticky sticking on the new more value oriented product.
Is that is that margin neutral margin dilutive penny.
Profit neutral Penny profit dilutive.
It is margin neutral.
Okay.
Okay.
We think thats going to open up a.
A lot more penetration bring people into the portfolio and then keep some people using it on a more consistent basis performance has been extraordinary it's very new and performance has been extraordinary already.
And from where we were able to watch it so far the results have been excellent and again I think that across the portfolio, there's lots of mix and trade up opportunity. Those items are more available we're adding things on the other end of the entire spectrum on our portfolio on the higher end of the spectrum, we're seeing great growth with those items largely.
<unk> is a great example that was called out too.
So we've got all of that and then eventually going to as I mentioned earlier, we're going to start adding these these cases in.
And like the bulk packs and it's going to change the dynamics of the business, bringing it more and more kind of mainstream and main meal.
I hear you it makes sense to me.
I'll pass it on.
Thank you.
Thank you. Our next question is from Michael Library with Piper Sandler. Please proceed with your question.
Thank you and good morning.
Good morning.
Just looking at the.
Household penetration growth by income bucket.
In the last 52 weeks before this complete nutrition launch you already have that lowest consumer household penetration up 17% and so.
I guess, what's driving that.
And with this launch how much higher do you think that should go if if theres already back good momentum as that.
Really where you see a kick up.
To sum a much faster pace and how do we think about the magnitude of that.
Okay.
So so look as part of our strategy over time, we want to make sure. We have an incredibly wide portfolio of products that really span different price points different offerings and also different benefits to consumers and what they're looking for our products. So we want to make sure. We have everything out there one of the things that we have the opportunity to do now is as we.
Get more and more scale.
We have the opportunity to bring products that are even more value oriented and build that piece out and what we know is that sometimes the initial price point is a little bit of a shock for some consumers. So the goal is to bring them into the franchise, let them kind of migrate through and then migrate up over time and use more of our more of our.
Our products every single day.
Okay. That's helpful just for the consumers understanding.
I'm looking at your slide with a complete nutrition package and.
Obviously, it doesn't say.
Nearly as good or almost as good as some of these others, but how do they understand the differentiation between this and the rest of the portfolio.
The price point conveys a bit of that message, but what's the right way for them to understand how they are different than what the value proposition distinctions would be.
I mean really it's.
It definitely people make assumptions on products a lot of sense based on price points. So that's probably the number one and leading indicator and having an aggressive price point is a piece of it but one of the other key pieces as we have brought a little bit more whole grains complete carbohydrates into this product and we've kind of called that out on the front.
It's very it's very small and it's subtle, but it's very focused and it can be it has to fresh Ted are incredibly high standards. It is it is kind of meets and exceeds our standards will be feeding my dogs complete nutrition on and off it it's going to be rotated in it's an incredible product that we're proud of but we can.
Offer a value which.
Can can keep some people out of getting into the portfolio.
Okay. Thanks, so much.
Yes.
Thank you. Our next question is from Bryan Spillane with Bank of America. Please proceed with your question Hey, Thanks, operator, good morning, everyone.
Just actually just two really quick ones for me one is and I think this is inferred and all the commentary made but I think just want to make sure Claire.
Excuse me based on where you stand today in terms of.
Cost inflation and productivity it doesn't sound like like another price increases is contemplated so just wanted to make sure that that was.
But that was I was hearing that correctly.
Yes, I mean, obviously until we price our chicken, we can't say for sure, but our read of the tea leaves would suggest that we will not be taking pricing at least not in the first part of next year. So we feel comfortable about where we sit from a commodities perspective based on the markets and the small portion of our commodity costs that we've already locked.
Okay and then the second question in the prepared remarks, Bill you talked about.
There was a discussion about.
So kind of balancing demand stimulation with not overheating the supply chain basically right. So can.
Can you talk a little bit more about that just how do you I don't know like what does the dial look like how do you turn the dials to make sure you're not over stimulating demand and.
I guess what are the bandwidth right in terms of just how much you could actually.
Exceed.
The 25% just trying to get an understanding of kind of how you approach approach that.
I mean, one of the benefits of this business is it's probably one of the most reliable and predictable businesses that I've seen in my 30 plus years of CPG.
We don't do any trade promotion no discounting so the single biggest driver and by far the vast majority of the growth comes from advertising investment and so our dial is advertising investment it's not a literally you turn it on and Tomorrow you see it but if you turn it on you start adding the users that will contribute meaningful volume over the coming months.
And so that's the way, which we which we can control the demand going forward and that's where we spend the bulk of our time is literally laying in advertising spending against what we think our capacity needs are going to be.
The reason we made the comment in the prepared remarks about the dialing it in fairly closely is three or four years ago, We would put a line in and it would give us capacity that will last us a year or two years and youre kind of fine on it now at the scale that we've achieved when you put a line and you can pretty quickly burned through the capacity of <unk>.
In less than a year and so we can't afford to have this thing planned for 25 and deliver 33 on an ongoing basis. Because you just won't have the infrastructure in place you just won't have the equipment installed lead times on equipment or long construction takes a long time staffing is quick we can staff up.
90 days, but if we're going to suddenly outperform our expectations by five or 10 points as we might have done over the last couple of years, we could find ourselves short shipping again, and we don't want to do that so at this point, we're very comfortable planning for call. It 25% growth. There is growth there is a little bit of headroom on top of that we planned for a little bit of headroom on top of that we have surge.
We don't want to be pushing over 30.
Alright, Thanks Ali.
Thank you.
Thank you. Our next question is from Bill Chappell with through Securities. Please proceed with your question.
Thanks, Good morning.
Good morning.
More on pricing, especially move to next year.
One do you think you'll get back to a normal cadence of just doing some pricing every year going forward or is there some pushback on.
When the pricing you've taken so far and then two more.
Importantly, I know you have a different product than the <unk>.
The dry goods.
See some increased promotions in kind of the competitive landscape that.
It may change your pricing attitude or do you think everybody is going to kind of hold the line even at the premium Super premium side as we move into 'twenty four.
Hey, Bill.
So let me talk about the category one.
<unk>.
As volume has kind of gotten softer we are looking at it category volume, yes, yes, I'm, sorry, as far as when I started.
Yes.
Yes, the category volume has gotten softer we are kind of all over it and we keep waiting for someone to really kind of start pressing on the pricing dial have not have not seen it have not seen increased promotion has been very very little kind of growth there.
It's been interesting at some point I think you'll see a bit of it.
But.
We haven't seen anything yet, but again I think that.
Historically youll see some people kind of.
Layer some of it in but not a lot.
From our standpoint, I think what we try and do is we will take pricing like when appropriate and very tact very strategically.
Very targeted and everything that we're doing.
So when we do a couple of points here and there yeah, that's probably going to be something that we'll always look at but a lot of the pricing that we have done is from how we've kind of modified and change the portfolio and the products that we brought into the market. It hasnt been just an across the board two or three price.
Tier, 3% price increase we've basically put new items in at higher price levels.
<unk>.
We just kind of taken.
Different opportunities over time in order to do a little bit on pricing.
I would add to that we also expect that there is fairly sizeable opportunities for us to improve the gross margins from throughput and yield we have built.
Built organizational capability over the last call. It year that is really focused on increasing throughput driving efficiencies in the manufacturing operation, providing driving efficiencies in the supply chain are much more competitive bidding on some of the key components that we buy where it used to just have to.
Take whatever you could get whatever was available now there's much more ability do strategic sourcing. So all of those elements will help us and could mitigate the need for further pricing. It doesn't mean, we won't try to take some pricing at some point, but the need for it won't be as great.
Got it and then switching back to some of the questions on the club channel and Scott.
At the store level, we've seen a lot of changes over the past few months.
You have got any benefit but can you maybe give us an idea of where we are.
Costco has 11 regions in.
And then I'm not sure if youre in the restore and it seems like there is more and more opportunity in front of you then behind you, but I just want to make sure I'm looking at the right way.
No. We believe that there is a tremendous amount of opportunity in front of us first.
First of all obviously year, one you get into the store. This has been a pretty pretty amazing year in pretty significant expansion. So we're going to have the benefit of that really all next year plus were call. It two thirds of the way into the cost goes through through Q3. So there is more cost goes to come and then not only domestically, but then.
And some other areas, even into Canada, and Mexico, and even in the U K, there's plenty more costco's, but the biggest single pieces and I touched on this earlier, we're in zero Sam's and we think that over time, the right proposition going into Sam's could be really helpful.
<unk> like another opportunity to be exposed to another group of consumers that shop for pet food at Sam's.
Great. Thanks, so much.
Thank you.
Thank you. Our next question is from Rob Moskow with TD Cowen. Please proceed with your question.
Alright. This is Jacob you can focus on.
Congrats on the quarter.
Thank you.
Two quick clarifying questions and then a broader question.
For media spend last quarter, you said that it would be up 15 million in the second half is that still true or it was today an update on that.
And then for freight and logistics costs does your guidance assume that.
The fuel costs and stuff will stay where they currently are or go back to more normalized levels or was it a conclusion.
Your question on media first so yes, we were up about $5 million in Q3 year over year will be up approximately $10 million in Q4 spend only a couple of million dollars last year. So we'll be kind of in the plus or minus $13 million range of spending for Q4, which we're really excited about I think it will give us a little.
Little bit of a help in Q4, but more importantly get us off to a strong start as we go into 2024.
Logistics has been holding steady we don't see a big change between sequentially between Q3 and Q4.
We've had a little bit of an uptick in diesel cost not significant but we've seen some favorability in some other areas and so we're feeling very good about the logistics expense right now.
Okay Awesome and then just more broadly back to media you said that next year, you'll kind of expect it to grow close to sales maybe above 100 million rough math, but then going forward you would expect it to leverage with sales growth, but it's my understanding that your media and sales are kind of like one to one.
When you turn on media you get sales. So how do you expect to generate the 25% sales growth in the later years with lower media as a percentage of sales.
There is certainly some scale benefits as we get further and further out one of the things that we've seen is the more you build out your fridge network and you get the visibility amplifying the advertising so stores with two and three fridges amplified the advertising and so we think that part of the reason that our advertising has gotten so effective in <unk>.
Given growth in excess of what we have planned for was because of the increased retail visibility and that doesn't go away, yes, net new fridges as a good thing, but the installed base of fridges lighted French sitting in store double or Triple Fridges continues to amplify the value of the advertising every successive year. So we think that's frankly, where we're going to get some of the bench.
<unk>, but also scale in the media, we will get some benefit there as well, yes, and just for perspective and I've said this before I mean, if we reach the $1 billion goal in 2027 and get the media spend down around 9% of sales, which we expect on both at $160 million of media spend one brand basically one country.
We think thats a powerful.
Resource to drive 25% CAGR.
Awesome I appreciate it and congrats again.
Great. Thank you.
Thank you. Our next question is from James Valera with Stephens. Please proceed with your question.
Hi, guys. Thanks for squeezing us in.
I wanted to ask on the expanded distribution of the large dog offering as well as the complete nutrition.
What does that look like in the fridges in store, which skus get taken out and replace with those or is that kind of a way to dangle that offer in front of retailers to motivate them to put in that second fridge.
Yes. It is.
As we built out new products.
We typically will really have a very deep discussion with the retailers about adding a second fridge. It's it takes up a fair amount of space.
Typically dedicating at least a full kind.
Two feet to it and a fridge on a shelf in order to get pack out. So it takes up a fair amount of space you never want to kind of take out existing items that are performing extremely well. So it is a really really big push to go into our second fridges and even some of our third fridges over time.
Okay. That's helpful and then Todd.
Todd maybe a follow up I know people have touched on the logistics piece, but I think you. Just you guys delivered really impressive results. There should we think of the current logistics expense at that kind of sub 7% rate as sustainable moving forward and maybe you guys just delivered on that kind of better than the 2027 target.
On an ongoing basis.
Yes, I mean, we laid out to your point, we laid out a goal of seven 5%.
Just ask back in February obviously, one of the bright spots as we've already beat that beat that target. So yes. We think we will long term be below the seven five obviously, if there's a big spike in diesel where lane rates from time to time that could that could drive it periodically higher but long term.
And we're very confident at this point with reasonable diesel costs that we will be sub <unk>.
7% and from what we can see right now obviously subject change, but we feel we feel good about being 7% or below for next year as well.
That's helpful. And then if I can maybe sneak in one last question on the breakdown of the household growth rate by income I was honestly surprised to see low income up as much as it's been.
Can you just give us an idea of maybe what skus are driving that.
And then from a consumer perspective, just kind of the.
<unk> value proposition that you guys offer that a consumer that has a little bit tighter of a budget would still be buying premium pet food.
Yes, Jim one of the one of the things I always struggle with in providing the data by income is it treats all income is if it's funding the same size as household the reality is that a significant number of our consumers who fall in that lower income bucket are in the smaller sized household they might be single and have a dog they might be the kids may have left the nest.
So that's the amendment dog and so the discretionary income that they have available is significantly higher despite the relatively low overall total income and given our skew towards younger households, we have a fairly significant number of millennial and Gen Z consumers, who are in that bucket, but for whom the dog is the only thing we're the most.
<unk> thing in their life. They don't have a car they don't have a spouse they.
Their expenses are relatively narrowly confined.
Okay. That's very helpful I'll pass it along.
Thank you. Our next question is from Jon Andersen with William Blair. Please proceed with your question.
Hey, good morning, everybody. Thanks.
Just two quick ones on the productivity work congrats on the benefits that you're delivering there.
As you look to the fresh future goal of getting to 18% EBITDA margin by 2027.
It looks like this year will come in closer to 8% from an EBITDA margin perspective, so you've got about a 10 percentage points over the next four years can you talk a little bit about the path you expect during that timeframe is it straight line does it ramp.
The improvement ramp in the out years and what some of the drivers are there and then the follow up to that is.
Todd I think you mentioned gross margin you expect it to be sequentially lower in the fourth quarter than the third quarter. When do you think you hit an inflection point, where we could see kind of sustained gross margin improvement sequentially going forward. Thanks.
So let's take your first question on EBITDA margins. So, yes look we were going to get around 500 basis points of EBITDA margin improvement this year, which obviously is terrific, we're not going to get 500 basis points.
Each and every year and obviously, obviously don't need to so where is that next 10 points that you mentioned going to come from so obviously five of it has to come from gross margin, we're going to have about $39 five ish percent gross margin for this year.
So we have about 550 basis points that goes obviously, that's half or a little bit more than half of it we talked about the media spend that will come down as a percent of sales.
A couple of hundred basis points, we've probably got a little bit more room to grow in logistics, but not significantly obviously, we've made tremendous strides there and then the rest of it quite frankly just comes from SG&A leverage if you're growing 25%.
We do not need to grow head count and other expenses.
More than high single digits, so theres, a tremendous amount of leverage.
In SG&A as well so those are the components.
We have really good visibility to it obviously gross margins the trickiest part to that.
And we have to execute really really well, but we're very confident with the scale of the business.
And our ability to execute.
Execute and we can be more productive.
And our lines that that will that will occur.
Cadence look the cadence is really hard to predict.
I think I'm confident we'll have some nice improvement both on gross gross margin and EBITDA margin next year again, a little bit too early to commit to a number.
Again, we've got four I got four years to get 10 points.
So I got to get to 250 basis points on average of EBITDA margin per year again, very confident we will do that but the exact cadence of that is hard to predict but I think we will get another nice chunk next year.
Thank you.
Thank you there are no further questions at this time I would like to hand, the floor back over to Mr. Billy Cyr for any closing comments.
Great. Thank you everyone I'll leave you with this thought the humorous Jerome K Jerome said about dogs, they never talk about themselves, but listen to you. While you talk about yourself and keep up and appearance of being interested in the conversation to which I'd add reward them for the patients and treat them fresh Pat. Thank you very much for your interest.
This concludes today's conference you may disconnect your lines at this time.
Thank you for your participation.
Okay.
Okay.