Q1 2024 Freshpet Inc Earnings Call
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At this time I'll now turn the conference over to Rachel Vice President of Investor Relations. Rachel you May now begin.
Rachel: Thank you good morning, and welcome to the fresh cut first quarter of 2024 earnings call and webcast on today's call are Billy Cyr, Chief Executive Officer, and Tom Tom Burke, Chief Financial Officer, Scott Morris, President and Chief operating Officer will also be available for Q&A.
Rachel: Before we begin please remember that during the course of this call management may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These include statements relating to our long term strategy focused 2027 gold pacer achieving these goals.
Rachel: That's for growth in the new technologies in 'twenty 'twenty four guidance words, such as believe could estimate expect guidance intend may project will or similar conditional expressions are intended to identify forward looking statements. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual result.
Rachel: To differ materially from those described in these forward looking statements, including those associated with such statements and in the Accuracies and third party data.
Rachel: Please refer to the company's annual report on Form 10-K filed with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today. Please.
Rachel: Please note 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 the information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Rachel: Please refer to today's press release for how management to find such non-GAAP measures why management believes such non-GAAP measures are useful a reconciliation of the non-GAAP financial measures. The most comparable measures prepared in accordance with GAAP and limitations associated with the non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that.
Rachel: It will be discussed on this call that presentation can be found on the company's investor website managements commentary will not specifically warfare presentation on the call rather is 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.
William B. Cyr: Thank you Rachel and good morning, everyone. The message I would like you to take away from today's call is that these strong quarterly results prove that some of the most critical financial metrics in our 2027 goals are achievable now we must prove to you that we can deliver them consistently over time.
William B. Cyr: These results did not happen by accident. They were were the result of a disciplined focus on the key drivers of profit improvement and the changes we have made as an organization.
William B. Cyr: And we are determined to continue those disciplined efforts until these results become a long term trend.
William B. Cyr: Further these results demonstrated that with increased scale comes increased profitability, which was the basis of our fresh future plan that we announced in early 2023.
It was then that we pivoted to a more balanced approach to growth and profitability versus our previous single minded focus on growth alone.
William B. Cyr: We were able to deliver these results because of the strength of the fresh cut business model and consumer proposition and strong improvement in the key fundamentals that drive our business there.
William B. Cyr: There are several important points I would like you to take away from these results first our growth model continues to deliver we've successfully absorbed the most significant pricing we've ever faced delivered strong volume based growth in the quarter and returned to the greater than 20% household penetration growth rate embedded in our long term targets.
William B. Cyr: Further we added those households at a customer acquisition cost or CAC that is comparable to the levels. We experienced prior to the price increases over the last two years. This demonstrates the strength of the fresh pet growth model. The power of our marketing and also provides the confidence that the model can continue to deliver the 25% net sales.
Growth embedded in our fiscal year 2027 goals second we've improved our operational effectiveness, we're now delivering significant year on year improvements in our quality input and logistics costs. The cost that we've been intensely focusing on and that has resulted in a step change in our adjusted gross margin and adjusted EBITDA margin.
William B. Cyr: Our operational achievements stem from our efforts to build strong organizational capability at all levels, beginning with our fresh cut academy that has strengthened our production workforce and also including some of the senior leaders, we have hired in the past year and a half.
And while these operational improvements are significant we believe we are just getting started and that our team is capable of delivering this type of operational excellence more consistently over time and potentially doing even better.
Finally, we are demonstrating the capability and operating discipline needed to balance capacity and demand at such a high rate of growth.
William B. Cyr: We're adding capacity on budget and on time and at a pace that enables us to keep up with our high growth rate without carrying too much excess capacity there.
William B. Cyr: This enables us to deliver strong fill rates to our customers, while simultaneously improving our margins and as a result of the rigor and discipline that we've put in place around our growth planning.
William B. Cyr: This is the balancing act between growth and capital investment that we have described to you previously and we are increasingly mastering it at a high rate of growth.
William B. Cyr: While we were pleased with the performance we delivered we're not satisfied.
William B. Cyr: To deliver this level of performance consistently over time and once we have proven our ability to do that we would consider revising our long term targets, but right. Now we are focused on maintaining momentum in each of the remaining three quarters of this year.
William B. Cyr: As we've mentioned many times before the manufacturing systems to make fresh pet food are still in their infancy.
William B. Cyr: We are investing heavily in organizational capability and technology to make those systems more reliable consistent and efficient and are making good progress on many aspects of the process, but we also know that we are still in the early days of the fresh pet food category and the opportunities for improvement are sizable.
William B. Cyr: We fully intend to realize those opportunities over time and have numerous initiatives underway to do that.
William B. Cyr: Now, let me walk through some of the highlights of the first quarter.
William B. Cyr: We had strong momentum in the first quarter and made tremendous progress against our long term plan and you can see that in our financial results.
William B. Cyr: First we started the year with very strong net sales growth with first quarter net sales of $223 $8 million up 34% year over year, driven primarily by volume growth of 31% and 3% price mix.
William B. Cyr: Second we saw a significant improvement in adjusted gross margin as well as adjusted EBITDA.
William B. Cyr: First quarter adjusted gross margin was 45, 3% compared to 41, 1% in the fourth quarter and 38, 5% in the prior year period.
William B. Cyr: First quarter, adjusted EBITDA was $36 million, an increase of approximately $28 million year over year.
William B. Cyr: Our diluted earnings per share was 37 cents.
Speaker Change: Excluding a mark up in the value of our equity investment EPS was <unk> 17 cents per share I've been looking forward to the day that I can say those words for a very long time, and I expect that to become a habit going forward.
Speaker Change: In addition to those financial highlights we made progress on our retail availability and visibility as well.
Speaker Change: We placed 617 fridges in the first quarter, including new stores upgrades and second slashed third fridges, bringing us to a total of 34812 fridges at retail.
Speaker Change: One 7 billion cubic feet of retail space.
Speaker Change: As of March 31st 2020 for fresh pack can be found in 27097 stores, 23% of which now have multiple fridges in the U S fritch.
Speaker Change: Fridge placements in store growth were supported by continued strong fill rates that ended the quarter in the high nineties again.
We've rallied the organization around our mainstream main meal more profitable plans well, we refer to as meaning more we're making the fresh pet brand more mainstream and getting people to use it as a main meal component and this creates intensity and concentration of the business that we believe will allow us to be more profitable.
Speaker Change: Focusing on the idea of mainstream according to Nielsen Omnichannel data, which includes e-commerce and direct to consumer as of March 30th 'twenty 'twenty four total U S. Pet food is a $53 billion category, we only have a 3% market share within the $37 billion dog food segment, which the majority of our business.
Speaker Change: Is today, leaving a vast runway for growth.
Speaker Change: Within the fresh frozen subcategory in measured channels, which continues to outperform the broader pet food category fresh pet has a 96% market share.
Speaker Change: The idea of the Humanization of pets is becoming more and more mainstream appealing to every income group and demographic and it is our goal to make fresh food the standard way to feed your pets.
Speaker Change: Our household penetration at the end of the first quarter was $12 367 million households, up 24% year over year and growing.
Speaker Change: Our high profit pet owning households, where hippos for short are growing even faster up 34% versus the prior year period.
Speaker Change: We remain on track to meet our target of 20 million households by 2027.
Speaker Change: Overall retail availability continued to grow with a C V of almost 65% and we continue to see upside in continued distribution gains going forward.
We will continue to focus on increasing the percentage of stores with second and third fridges.
Turning to the concept of main meal, we use our advertising to educate consumers on the benefits of fresh food for their pets and that is the key driver to convert more consumers choose fresh pet is the main meal.
Speaker Change: Today, 48% of fresh pet buyers use the product is the main component their pets meal and there's a significant opportunity to increase this percentage even with our heavy users.
Speaker Change: 37% of fresh pets users are hippos and they represented 89% of our sales in the first quarter.
Speaker Change: By focusing on fresh healthy food offering a wide range of price points and expanding our recipes. We believe consumers will naturally convert from using fresh Pat as a topper to more of a main meal item centering the plate around fresh.
Speaker Change: This concept of converting toppers and domain Bill users will in turn increase by rate too, which was $96.84 at quarter end up 5% versus year ago.
Speaker Change: Based on Mega Channel data. We currently have an average of 18.9 S. Skus per point of distribution up from 16.4, Skus one year ago.
Speaker Change: We plan to increase the number of Skus available at each retailer by adding second and third fridges, which amplifies our marketing spend and drives visibility for the brand while also allowing us to showcase a wider range of our portfolio.
Turning to the more part of main in more more profitable.
Speaker Change: As I mentioned earlier, we significantly improved margins this quarter with solid operating performance. Thanks to the work of our team.
Speaker Change: Quality yield input cost and throughput all drove the over delivery.
Speaker Change: Last quarter I suggested that we had reached an inflection point and we're turning a corner on profitability. Because we are now at a point, where we can leverage our scale increased business intensity and concentration we now seeing those benefits of scale play out and they are driving increased profitability.
Speaker Change: First quarter adjusted gross margin increased 680 basis points year over year to 45, 3% and adjusted EBITDA as a percent of net sales was 13, 7% compared to 1.8% in the prior year period.
Speaker Change: <unk> has been a key area of focus for us and it was only six 4% of net sales in the first quarter, improving 290 basis points year over year and coming in below our long term target of seven 5%.
Speaker Change: We are greatly encouraged by these results and believe there is a significant opportunity to drive further profit improvement going forward, whether in its facilities still ramping up production and our continued work on O E to increase yield and throughput.
Speaker Change: That leads me to an update on our capacity.
Speaker Change: We feel confident in our expansion and efficiency projects, which are all on budget and is currently has three lines operating today, one roll line and to bank lines and this facility is producing approximately 25% of our total production volume.
Speaker Change: Our fourth line in N. S is slightly ahead of schedule and expected to start up by the end of the third quarter.
Speaker Change: This additional line kicks off phase two and N S and will alleviate some complexity of changeovers and S. SKU assortment since it will be our second roll line in this facility.
Speaker Change: We've continued to evolve our capacity expansion plans to drive greater capital efficiency. We are intently focused on first maximizing the throughput of our existing lines by investing in an operational excellence program designed to increase our OE.
We've seen steady progress on this particularly in Bethlehem with a program that's been underway for more than a year.
Speaker Change: Second maximizing the capacity of our three existing sites. So that we can avoid the high cost of incremental infrastructure and overhead for example in Bethlehem, we're converting storage space two out of seven flying and kitchen, South. We believe there is room to add one or two more lines in the existing building and an N. As we're looking at ways to.
Speaker Change: Add more lines as well.
Third developing and implementing new technologies that generate more throughput per line and improved yield and quality. We've developed one technology has shown great promise and others are in earlier stages of development. It is still too early to tell when these might impact our capacity or P&L, but we are we believe these technology investments are import.
Because our need for capacity will only grow as time progresses, and we continue to believe that our manufacturing expertise will be a key strategic advantage over the long haul Scott who successfully pioneered the development of our existing products and processes is leading our efforts to develop and commercialize these potentially breakthrough technologies.
Speaker Change: As I said earlier, our first quarter results demonstrate that scale leads to improved profitability Todd will walk through our updated guidance, but I'd like to provide an update on our results versus our long term targets.
Speaker Change: We are clearly ahead of the pace required to deliver our original 2027 goals, which gives us increased confidence in our ability to either meet or exceed those goals, but we need to show. We can deliver these results consistently albeit encouraging it is still early in the year and we want to be measured in our forecast for the balance of the year.
Speaker Change: We knew the first quarter sales were going to be strong because of our sizable media investment in Q4 of 2023 and the momentum that generated and the 34% first quarter net sales growth still exceeded our own forecast, we plan to carefully manage our topline growth for the remainder of the year. So that we do not get ahead of our installed capacity or organizational.
Speaker Change: Ability, we believe our model works very well at approximately 25% growth generating the right balance of growth capital investment and cash generation.
Speaker Change: Adjusted gross margin of 45, 3% in the first quarter was above our 2027 target of 45%, giving us even more reason to believe we can deliver our long term goals, we're able to deliver this despite the fact that N. S is still subscale and in startup mode and we have not implemented any of the new technologies, we are working on.
Speaker Change: Yet.
Speaker Change: Further our fresh pet operational excellence program is still in the early innings and we believe there's lots of upside as we implement implement that program, but as I mentioned earlier, we want to demonstrate consistent performance at this level before we commit to anything beyond that.
Speaker Change: Adjusted EBITDA margin of 13, 7% in the first quarter is tracking ahead of plan to achieve our goal of 18% adjusted EBITDA margin in 2027.
Speaker Change: As you know we tend to Frontload, our media investment Q1 media investment as a percent of net sales was more than 300 basis points higher than it will average for the year. So when you adjust for that media spending cadence Q1's, adjusted EBITDA margin was closer to 17% very close to our 2027 goal.
Speaker Change: We believe that if we can consistently deliver the adjusted gross margin. We delivered in Q1 that we can deliver the remaining building blocks of our adjusted EBITDA margin target of 18% through effectively leveraging the added scale that comes with our growth.
Speaker Change: Operating cash generation of $5 $4 million was ahead of our plan further increasing our confidence we can self fund our growth with no need for additional equity and potentially not even needing any new debt.
Speaker Change: In summary, we are off to a fast start this year, we have more work to do to prove to our shareholders that we can maintain or exceed this level of performance, but we are confident in our ability to execute based on what we know today and what is within our control now let me turn it over to Todd to walk you through the details of the Q1 results and our updated guidance Todd.
Todd: Thank you Billy and good morning, everyone as Billy mentioned, we had an excellent first quarter now I'll give you some more color on our financials and updated guidance for the year.
Todd: First quarter net sales were $223 $8 million up 34% year over year.
Todd: Nielsen measure dollar growth was 26% versus the prior year period with broad based consumption growth across channels, we saw 28% growth in X Aoc, 25% in U S food, 13% growth in pet specialty and over 100% growth in the unmeasured channels.
Todd: First quarter adjusted gross margin was 45, 3% up 680 basis points year over year. This was driven by improvements in input cost quality yield and throughput specifically input costs as a percent of net sales improved 390 basis points, reflecting a small.
Todd: At a pricing from last year's price increase improving yields in our manufacturing operation and lower commodity costs.
Todd: Quality cost improved by 240 basis points and plant cost improved by 60 basis points, both driven by strong operating performance across all three manufacturing sites.
Todd: Within plant cost, we were able to build much needed inventory, which contributed about 100 basis points in the quarter.
First quarter adjusted SG&A was 31, 7% of net sales compared to 36, 7% in the prior year period. We spent 14, 3% of net sales our media in the quarter down from 15, 5% of net sales in the prior year period total media investment was up 23% year over year in line with our plan.
Todd: And to have our media spending a bit less frontloaded this year.
Todd: Logistics costs continue to improve and were six 4% of net sales in the first quarter, a decrease of 290 basis points compared to the prior year period, we believe that about one third of this improvement was due to market conditions, such as lane rates and diesel costs and the remainder was due to deliberate actions.
Todd: We took to increase fill rates reduced miles and other efficiency focused efforts in fact, our logistics cost in the quarter were $1 $3 million lower than in the year ago period, Despite shipping 31% more pounds of finished product.
Todd: First quarter, adjusted EBITDA was $30 $6 million or 13, 7% of net sales compared to $3 million or one 8% of net sales in the prior year period. This sharp increase was driven by better than expected net sales an improvement across input quality logistics and plant costs.
Todd: Capital spending for the first quarter was $46 5 million in line with our expectations.
Todd: Operating cash flow was $5 4 million and we had cash on hand of $258 million at the end of the quarter. We continue to 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.
Todd: To bridge a gap in 2025, if it occurs.
Todd: Now turning to guidance for 2024.
Todd: We are maintaining our net sales guidance of at least $950 million until we have greater confidence that we will have adequate rolls capacity to meet a higher level of demand. Later. This year. This will also allow us to manage our growth to deliver the right balance between growth and capital investment as we have said we are carefully.
Todd: Managing our growth to live within our capacity plans.
Todd: We do find that our production performance from existing lines and facilities exceeds our plan, we would be comfortable letting the growth drift a bit higher. This year. However, we also need to be mindful that we need to have adequate capacity to meet demand for next year as we exit the year.
Todd: So we're managing this closely and we will not commit to a higher level of growth and so we are sure that we can supply it reliably both this year and next year, even if that means our growth rate later in the year is below our long term rate of 25%, we can reaccelerate as capacity becomes available.
Todd: In terms of cadence, we still expect the first quarter to have the highest percent net sales growth year over year and expect sequentially lower percent growth throughout the remainder of the year, we may pull back media to control growth in line with long term algorithm not because demand is slowing we are just managing the pace of growth as we explore.
Todd: And capacity.
Todd: We are raising our adjusted EBITDA outlook from our previous guidance of $100 million to $110 million to know at least 120 million to reflect the over delivery in Q1.
Todd: While our performance to date has been very encouraging we will not commit to a higher level of profitability for the balance of the year and so we have proven that we can repeat Q1's performance reliably.
Todd: As such our revised guidance at Q1 over delivery to our target for the year, but has not changed our expectations for the remaining quarters yet.
Todd: We now expect adjusted gross margin to expand by at least 300 basis points for the full year compared to 100 basis points previously and expect commodity deflation in 2024.
Todd: Capital expenditures will be approximately $210 million to support the installation of capacity to meet demand in 2025, consistent with our previous guidance. In summary, we are encouraged by the first quarter results. However, it is still early and given the potential for the environment to change as we progress throughout the year and the <unk>.
Todd: Seen issues that arise from time to time, especially for high growth businesses, we are going to be prudent in our forecasting we said last quarter that we are at an inflection point and believe we have turned the corner on profitability. We have gained scale and are beginning to see the benefits of that.
Todd: Billy mentioned, there is more upside longer term as we continue to work on operational efficiencies and bring more capacity online across our facilities, especially in emmis.
Todd: For now, though we feel comfortable maintaining our long term targets of 45% adjusted gross margin and 18% adjusted EBITDA margin because we once approved we can consistently deliver on our profitability metrics over time before before we commit to new targets.
Finally, this step change in our profitability adds to our confidence that we will be able to fulfill our mission of elevating the way we feed our pets with fresh food that nurses. All we are building fresh pet into an iconic market leading brand that is redefining what pet food is and that we believe is better for them.
Todd: Pets people and the planet.
Todd: That concludes our overview, we will now be glad to answer your questions. As a reminder, we ask that you. Please focus your questions on the quarter guidance and the company's operations.
Todd: Operator.
Speaker Change: Thank you.
At this time will now be conducting a question and answer session.
Speaker Change: If you'd like to ask a question today. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue.
Let me first start to feel like the Australia question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: So they may address questions as many participants as possible. We ask you. Please limit yourself to one question and one follow up.
Speaker Change: One moment. Please for we poll for questions. Thank you.
Our first question comes from the line of Ken Goldman with J P. Morgan. Please proceed with your question.
Kenneth B. Goldman: Hi, good morning, Thank you.
Kenneth B. Goldman: Good morning.
Kenneth B. Goldman: Yes. Thank you good morning speaking with investors. This morning, I think there's a general feeling.
Kenneth B. Goldman: You guys have addressed this a little bit that your outlook, you know maybe remains conservative and I understand.
Kenneth B. Goldman: There is still uncertainty about production capacity towards the end of the year, but just going beyond that in addition to those capacity questions. I guess is it reasonable to think that you know.
Kenneth B. Goldman: There is still a little bit of prudence as well.
Kenneth B. Goldman: Your top and bottom line guidance outside that right I'm, just trying to think of areas, where you might be a little more circumspect.
Kenneth B. Goldman: Just looking forward than what maybe current conditions might indicate.
Speaker Change: Yeah. Thanks, Thanks for the question Ken I'll take the top line part of that and then Todd will give you our view on the bottom line part of that but as you know we are very thrilled with the Q1 performance and it was a real good confidence.
Speaker Change: Infirmity point that said our strong volume based growth is back and we have our household penetration growth is back to where we want them to be I mean, the demonstrated consistent strong performance on that level and it's also proving that the media is driving our growth. We have really strong Q4 media that drove the growth in Q1, but as you acknowledge the reality.
Speaker Change: He is that we have to be very mindful of the balance between demand and capacity and the cash that it takes to to deliver the capacity and we're trying to find that fine line where.
Speaker Change: We're not particularly concerned based on what we see about the macro market. Although we're hearing everybody else's reports on it we're not seeing it in the environment. We're operating in we're seeing the strong household penetration growth across a variety of income groups. We're seeing very good pull across a variety of classes of trade. So we feel very good about that our concern is really based on capacity.
Speaker Change: The city available this year and capacity next year and if we get too far ahead of ourselves our fill rates go down and we start needing to drink pull forward more capacity additions the counter to all that and the anecdote to that for US is if we continue to see very strong operating performance, meaning throughput on our existing lines it'll give us license to lean in a little.
Speaker Change: More than what we're already doing but we're really going to be focused on managing the growth to fit within that very tight band that we've outlined because that's where we operate best I can give you a little bit of view on the bottom line, yes, I mean, obviously the big variable for.
Speaker Change: EBITDA perspective is the gross margin line. So obviously terrific Q1, a little bit over 45% with getting we've given guidance of at least 43. So it kind of one of the what are some of the issues that could bring that down for the rest of the year. So first and foremost is as we had in the opening remarks, we built much need.
Speaker Change: Inventory, particularly enrolls.
Speaker Change: In Q1 that helped us by about 100 basis points.
Speaker Change: From a fixed cost leverage perspective that will not repeat later in the year and in fact will likely unwind. So that will put a little bit of a headwind on gross margin for the for the remainder of the year, we had a great quality quarter. As you know that can move around so we're being a little cautious on.
Speaker Change: And we continue to be at that less than 3% rate on quality. So a little more conservative there. We do have our annual wage increase and the plants coming in June not a huge impact, but we'll put a little pressure on gross margins and then there's the fourth line and <unk> will be starting up in the third quarter, we've done a much better job.
Speaker Change: We're bringing up lines not as big of an impact on the P&L was as in the previous years, but there will be.
Speaker Change: An increase in fixed costs on the balance sheet at the end of Q3 going into Q4, so feel great about the start we do have some pressures, but if some things go our way obviously, we can do a bit better.
Speaker Change: Thank you for that that's helpful. Another quick follow up as we think about modeling.
Upcoming quarter, two Q are there any particular factors, we should consider either positive or negative and I'm just thinking about areas like the timing of media spending fridge placements and I guess the timing of that inventory on one you mentioned thank you.
Speaker Change: Yeah.
Speaker Change: I'll say a sequential build in revenue not a huge one but we you know we love a sequential build in revenue in Q2 are fairly strong media spend for the quarter were still working through a couple of things that could change a little bit, but we'll have a fair amount of spend as we always do in the second quarter.
Speaker Change: I don't we may unwind some of the inventory in Q2 more of it might be in Q3, a bet that that is still a variable, but it will unwind later in the year.
Speaker Change: Those are the those are the big areas and logistics continued to be favorable for us.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.
Hey, Thanks, Good morning, everyone I guess, maybe a big picture question. If you look at the expanded scanner data that we now get a fresh that's driving I don't know, 50% of the dog food category growth year to date, 60% since since March.
Mark Stiefel Astrachan: It certainly seems like.
Mark Stiefel Astrachan: Is it a category captain.
Mark Stiefel Astrachan: Cause increased amongst.
Numerous I guess, how do you think about that as it relates to discussions with retailers regarding expanding existing fridges, adding pregnant third fridges going into some of those places where you're under penetrated and retailers, where you don't exist like Sam can you just maybe talk big picture about kind of how you're approaching that today versus where it.
Mark Stiefel Astrachan: You were 12 months ago, particularly as you come out of that period.
Mark Stiefel Astrachan: <unk> constraint.
Mark Stiefel Astrachan: Hey, Mark.
Mark Stiefel Astrachan: So look I feel like this is the work we've been doing for a very very long period of time.
Mark Stiefel Astrachan: We're really confident we're offering a superior product and I think it's increasingly recognized not only by consumers, but I think just generally in the marketplace.
We're seeing retailers.
Kind of just really kind of reassess what's going on in the category and become more and more comfortable with adding more fridges deeper into their distribution.
So.
Mark Stiefel Astrachan: I think what we'll start to see is we'll continue to see second and third fridges added over time.
Mark Stiefel Astrachan: Yeah.
Speaker Change: Got it that's helpful.
Speaker Change: And then maybe another question just on capacity.
Speaker Change: So.
Speaker Change: You haven't formally updated kind of where we're going beyond this year, you've talked obviously about the efficiency programs in existing facilities and those added.
Speaker Change: So that's ramping.
Speaker Change: You also talked about all these added lines I guess any way frame just how much incremental capacity all of this together collectively can be as we sit here today.
Yes, Mark it is it is a little bit of a complex forward. Because there is you know capacity additions that come from our existing lines as we get the higher throughput.
Additional lines in the existing facilities and then obviously at the new technologies that we've talked about I think what we would prefer to do is just have people think about us as tightly managing the capacity additions to be consistent with the net sales growth that we're projecting.
Speaker Change: We are we've gotten really good and really tight at projecting or our volume and net sales out over extended periods of time, and then building a capital spending plan and an operational improvement plan that is able to supply that we're really guided by getting to fill rates that are very high fill rates because what we've seen over time is if we have a high field.
Speaker Change: Great. That's a really good indicator that we have a lot of good performance on the operation side, whether it's the quality part whether it's the freight cost, but getting a high fill rate becomes a very good marker for operational effectiveness or operational performance. So I would look at the net sales line and say that we will build capacity to adequately supply that over an extended.
Speaker Change: At a time, if theres variations in and the growth rate, we will find a way to match it but we'd really like to manage the growth rate to live within our long term guidance.
Speaker Change: Got it alright, thanks, everyone.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Peter Benedict with Baird. Please proceed with your questions.
Peter Sloan Benedict: Hey, good morning, guys. Thanks for taking the question.
Peter Sloan Benedict: My first is just on there was a comment around kind of adding organizational capacity to support the growth maybe talking about your views on that both short term and longer term.
Peter Sloan Benedict: As you think about kind of the cadence of growth of the business and what's going on just from a.
Peter Sloan Benedict: Organizational capacity, where you where you're focused.
Speaker Change: Yeah, I mean, obviously, we've added quite a bit of talent in the last 18 months. We added you know head of manufacturing.
We added a head of quality, we added a general counsel, we added Rachel and her role in Investor Relations and I think it's fair to say that if we're a company that's guided to $950 million in sales this year and will be one point.
Speaker Change: $8 billion in 2027, there will be fairly sizable increases in the overall organizational capability, but we filled in many of the most critical top role that doesn't mean, we won't add any other top roles as we kind of expand the.
Speaker Change: Footprint of the company and develop high level sophistication in several of the areas and it's something we're always doing we're always looking for what's next and just like we plan the capacity out over a longer period of time, we're now planning the organizational capability. If theres one learning that we've had over the last couple of years is that during the pandemic, we probably got a little bit behind on bill.
Speaker Change: <unk> organizational capability, and we're not going to let that happen again.
Speaker Change: Yeah.
Speaker Change: No that makes sense, thanks for that and then just.
Speaker Change: Maybe Todd just as you think about the 18% target in 2027 gross margin number already kind of getting to that 45, as you think about upside to that.
Speaker Change: Do you think that is more opportunity in gross margin if that were to potentially come through I'm, just trying to think about how or understand how youre thinking about.
Speaker Change: Some of the.
Speaker Change: Upside opportunities within within the operating margin profile for the business longer term. Thank you.
Todd: Yeah sure. So obviously, we're not going to we're not in a position right now to change our guidance, but you know where the upside could come from clearly the biggest piece is gross margin. So we're ahead of schedule.
Speaker Change: We have a lot of projects and a lot of room to grow over the next few years. So we're gonna shoot to try it.
Speaker Change: To try to beat the 45 at some point.
Speaker Change: But obviously, we're not changing that right now the other piece absolutely logistics, which is below our definition of adjusted gross margin. You know, we're already 100 basis points below that long term target that we called out an academy last year.
Speaker Change: The other piece, but gross margin the biggest component.
Speaker Change: Great. Thanks, so much good luck.
Speaker Change: Thanks.
Speaker Change: Our next questions are from the line of refresh Perique with Oppenheimer. Please proceed with your questions.
Refresh Perique: Good morning, and thanks for taking my question. So just going back to your unmeasured channels. So you know greater than a 100% growth in consumption. This quarter. How do you guys feel about the sustainability there and then just curious what you're seeing in the online channel.
Refresh Perique: So.
Refresh Perique: We're kind of how you're doing so look we have so much opportunity to expand accessibility to this this business and this brand.
Refresh Perique: It's not it's in all the unmeasured channel, especially through E. Commerce, We talk about club we're talking about.
Refresh Perique: Opportunities in math, there is such tremendous opportunity and a long long runway in front of us to continue to kind of expand accessibility and make sure that we wherever consumers want to buy our products, where as accessible as we possibly can be so we feel terrific about the runway there for the next several years, if you look at them they're outpacing.
Those unmeasured channels have been outpacing growth, we start talking about it over a year ago I would think we have several years, where we have that opportunity and then theres. Several other growth levers that we have behind that world will continue to kind of press out and expand to we'll talk about those I think more into the future.
Speaker Change: Great and then maybe just one follow up question. So the extent that we continue seeing EBITDA upside are there opportunities to pull forward investments into this fiscal year.
Speaker Change: Yeah, we're actually mean, where we're always assessing that there are some opportunities.
Speaker Change: It's probably not as much a traditionally from a from a marketing perspective, but there are some some project work from a gross margin improvement that we're looking at right now we're not saying, we're not talking huge amounts here, but I.
Speaker Change: Like I said earlier, there's a number of projects.
Speaker Change: That Scott fleet, leading many of them to try to improve gross margin over the next couple of years and we'd like to spend a little bit money.
Speaker Change: Now and into 'twenty five to try to fast forward as many of those as possible. We've actively identified a whole bunch of work that's hoping to create a more longer term annuities and margin expansion over time. So there's actually even two areas that we're we're working around I would add to that that we're also thinking.
Speaker Change: About that from an organizational capability perspective, too if there's places where we see an opportunity where increased organizational capability can accelerate our margin improvement will make that investment as well yeah. It really we feel incredibly fortunate as a company and organization and look the work the team has done extraordinarily well.
Speaker Change: But every single area of the organization is performing incredibly well and what that leads us to is how do we think as far forward as we possibly can in every single area and kind of leverage the leadership position that we have and be as thoughtful about our business as possible.
Great. Thank you I'll pass it along.
Speaker Change: Our next question is from the line of Brian Holland with D. A Davidson. Please proceed with your question.
Brian Patrick Holland: Yeah. Thanks, good morning.
Brian Patrick Holland: Just if I triangulate the commentary about.
Brian Patrick Holland: Some of the throughput initiatives that we're working through and as we get increasingly flexible with how we think about the existing.
Brian Patrick Holland: Manufacturing base, and adding lines et cetera.
Brian Patrick Holland: Are there any implications for that are ramifications that flow through the capex.
Brian Patrick Holland: As we think about the next few years and maybe with that.
Speaker Change: I haven't heard any commentary about the change in the free cash flow inflection timing, but.
Speaker Change: If the throughput initiatives are coming through if we can add existing if we can add more capacity within the existing network and.
Speaker Change: We have this EBITDA margin upside can we get free cash flow positive in fiscal 'twenty five.
Speaker Change: So look everything that we're doing on that front is obviously starting to pay some huge dividends and my.
Speaker Change: My goal in the organization's goal is to push out those capex investments to the right as far as possible with all obviously still maintaining enough capacity to grow the business around the 25% rate. So I think the organization is doing a really really good job around that.
Speaker Change: Getting free cash flow positive and 25 would be would be challenging still feel great about 26, I would say obviously the operating cash flow has improved dramatically in the last 12 months to 18 months, we're sitting on a fair amount of cash right now.
Speaker Change: As everyday goes by I feel more and more.
Speaker Change: Secure that we will not have to go out and raise additional funds. We may have to you know a little bit of a bridge term loan or something or revolver, but that that cash flow position that liquidity position continues to improve.
Speaker Change: So everything that were going on from a throughput and yield is not only improving margins, but increasing free cash flow, but we continue to feel great about the about the forecast in that area that we've put out.
Speaker Change: I appreciate the color Todd and then.
Just kind of stepping back.
Speaker Change: And I appreciate the you know appropriately conservative.
Speaker Change: Management of your guidance both for.
Speaker Change: Near and longer term.
Speaker Change: We talk about the inflection that we're seeing this morning and the earnings power of this model, but obviously this is a culmination of.
At least the past five quarters kind of building to this so when you talk about sort of wanting to be careful here and watching kind of quarter by quarter, what particularly keeps you up at night right now with respect to like kind of what you see in Q1, and some sort of anxiety about hey, we're not sure.
Speaker Change: Whether we can sustain this because clearly we have some points on the board now a sustained progress to this point. So I just wanted to make sure I understand what you were particularly focused on that would create some variability in the model as we look over the next 12 months and certainly beyond.
Speaker Change: Yeah, I mean, Brian you have to start with you you have to start with the fact that the the especially on the gross margin and EBITDA margin. It was a very significant step up from the trajectory that we had built as you pointed out over the last five quarters and so what we want to be is appropriately conservative to say that maybe not all of that will stick.
Speaker Change: In the subsequent three quarters of this year, we hope it does and we're trying to plan to make that happen, but the reality is it was a very big step up and we just don't want to plan on everything happening right every quarter until we've demonstrated that over a much longer period of time. This is a new business. This is a completely new technology and nobody else does what we do.
Speaker Change: And so there is more variability than you would normally see in a much more well established business, but we're getting better and better at it we're managing it better and better the top line part of this is is the part that has you know has been much much more stable over a long period of time, we're able to predict that really well in this case the top line is being.
Speaker Change: Driven by our ability to supply it reliably and go back to the comment I made earlier, we believe having a very good fill rate is a very strong indicator of operational performance and we do not want to get ourselves in a position, where we don't have a strong a high fill rate because that will indicate that we're having some other issues. So we're going to plan the growth to live within the capacity in <unk>.
Speaker Change: That strong fill rate.
Speaker Change: Thank you. Our next question is from the line of Bill Chapell with Truest. Please proceed with your question.
William Bates Chappell: Good morning, Thank you.
William Bates Chappell: Hey, just had earnings.
William Bates Chappell: First kind of question or maybe a little more color on the roll capacity issues that you might run into later this year.
Speaker Change: Any sense of just.
Speaker Change: I'm just trying to Zen.
Speaker Change: This early in the year it seems.
Speaker Change: Enrol production is fairly straightforward I'm just trying to understand.
One have you seen any surge in kind of rolls versus bags.
It is new customers, who come in and kind of what's the difference there and then too.
Speaker Change: Do you see.
Yeah.
Speaker Change: There being some other issue I'm just trying to understand why.
Speaker Change: Youll capacity would be tough to do that or if you're just trying to be conservative that's moved to the back half of the year just in case.
Speaker Change: Bill I think as we said since the beginning we knew that you know this is a little bit of a game of leapfrog <unk>.
Speaker Change: Bring up a line. It gives you a big surge in the capacity for that particular product form and you do fine and then you have to think about bringing up the next line, which might be on bags. In this case. The one we're bring up now was roles, but after that there'll be bag line and we havent spaced out just right.
Speaker Change: Are we believe it is just about right, but you are dependent upon bringing that line up at the rate you want on the timing of that you want and that means construction to be complete you have to do all the line commissioning qualification and then you have to go through a ramp up curve on the line and we are at the point now where our growth has been very robust on both roles in bags so were dependent upon.
Speaker Change: Next roll line coming online and we just don't want to get ahead of ourselves. There's always some variability in the startup of the line and we just don't want to get too far ahead of ourselves. The growth has been good on rolls and we are at the point now where the operational improvements. We've made in Bethlehem are helping us build inventory on roles. So that is the net is the consumption of roles continues to grow in Q2 and Q.
Speaker Change: Three we can supply it from the existing facilities in existing line, but we need that line to come on in and it otherwise we will get in a position mobile will start short shipping a role or at a minimum on drawing down our inventory and our fill rates will drop so it's what it was planned it's built in the plan all along it's the way we've been thinking about it and I would say like you mentioned.
Speaker Change: In the beginning of a question you mentioned an issue. There is no issue. We just wanted to make sure we stay within a band that we are comfortable with and as Billy said, we're running actually slightly ahead from a standpoint of bringing capacity online.
Speaker Change: Got it okay I'll follow up later on that.
Speaker Change: Yes.
Speaker Change: On the second cooler initiative, I mean, certainly I understand and get more than enough metrics showing how is he had a second cooler you drive velocity, but.
Speaker Change: At some point do you need more skus to need more forms or different products.
Speaker Change: To fill those coolers to really keep the velocity going or are you fine with kind of the core four five skus you have in both coolers just to drive forward.
Speaker Change: Actually built.
Speaker Change: Actually a really good question and something we have been doing a ton of work around and Youre going to see over the next 12 to 18 months, you'll kind of see us basically looking through the portfolio and actually bringing down we've actually been on a downward path on bringing down complexity in the number of Skus, we have across the portfolio. Okay. So youll see.
Speaker Change: Occasion, and Youll see products that are more suited to our kind of future state manufacturing and what the future state. It's like within the next 12 months it'll be literally optimize portfolio to make sure. It works incredibly well within our overall manufacturing network, while balancing out the demand that we need from a consumer standpoint.
Speaker Change: So we're really trying to optimize the entire portfolio to maximize on consumer demand and maximize on profitability and that there is a huge piece of work that we're I was talking a little bit earlier about leaning forward and thinking forward on what we need to do with a company. That's exactly the work that we're embarking upon now all that being said I will say, we are having incredible success.
Speaker Change: As we're going into second coolers and one of the things we're doing in second coolers as we are spreading out on some core skus to make sure that we have holding capacity through the weekend because the reality is in stores with high velocity. We are still seeing some out of stocks and there's there's definitely potential for us to build out on some of the core Skus. We are seeing core skus basic SKU excuse it had.
Around for 15 years continue to grow at kind of mid teens rates, that's like really good stuff on the other piece of it we are definitely seeing kind of a more specialized parts of the portfolio.
Speaker Change: Some of the little more feature oriented benefit oriented and actually most humanized and most expensive product you have leading growth rates. So we're kind of seeing it across and while we don't need many more we need to optimize what we have and again that'll go to the work that we're embarking upon.
Speaker Change: Great. Thanks.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Our next question is from the line of Bryan Spillane with Bank of America. Please proceed with your questions.
Bryan Douglass Spillane: Thanks, operator, and good morning, everyone.
Bryan Douglass Spillane: I just had a follow up on the questions around free cash flow and cash so.
Bryan Douglass Spillane: Maybe Todd.
Bryan Douglass Spillane: You were cash from operations positive this quarter.
Bryan Douglass Spillane: And.
Bryan Douglass Spillane: Looks like a lot of it is just the profitability.
Bryan Douglass Spillane: But can you can you talk a little bit about the path to free cash flow how much of it will be just the increase in profits versus <unk>.
Bryan Douglass Spillane: Sourcing from.
Bryan Douglass Spillane: Working capital or I guess over time, Capex, but just trying to get an understanding of other things we should watch in terms of monitoring free cash flow other than capex and profits.
Yeah. So look we're trying to manage.
Bryan Douglass Spillane: We're still growing obviously at an extraordinary rate and so we will have to continue to spend.
Fairly heavy amount of capex to build out capacity over the next few years, we're trying to manage that in the kind of the 200 to 225 zone and we've done a nice job of doing that.
Bryan Douglass Spillane: We're off to a good start this year, so I feel very comfortable that we can manage within that range. Most almost all of where we're going to get to positive free cash flow to your question will come from profitability. So as the business expands as the margins expand.
Bryan Douglass Spillane: The amount of EBITDA that we're going to throw off is obviously going to increase fairly substantially over the next couple of years, if we're able to execute our plan. So.
Bryan Douglass Spillane: Nothing dramatic and working capital will obviously try to manage that as closely as we can but it really is just the profitability and the scale and the growth of this business that will drive all of the <unk>.
Bryan Douglass Spillane: Fast majority of the operating cash flow alright, that's super simple I can follow that.
Speaker Change: And then the second question just around the convert can you remind us.
Bryan Douglass Spillane: Just given.
Bryan Douglass Spillane: Given the share price just the mechanics, I think we're bumping up close in terms of.
Bryan Douglass Spillane: Of it of it being convertible, but just could you just remind us all of just the mechanics, and what should we be watching for in certain terms of the share price.
Speaker Change: Yes, I mean look.
Speaker Change: It's obviously a five year.
Speaker Change: Convert.
Speaker Change: We cannot force that conversion on our end a.
Speaker Change: Fourth until year, three so nothing to do with from from our side, we're at a point where someone actually could force.
Speaker Change: Uh huh.
Speaker Change: Could convert.
The bondholders could forced us to convert but because of the optionality value of it no one's has any.
Speaker Change: Rationale to do it they could trade out the bond and take a profit, but they're there they would leave money on the table. If they were forced to convert so it's highly highly unlikely there.
Speaker Change: There will be no dilution from a from a GAAP perspective until we get net income well over $100 million.
Speaker Change: And then just don't forget we have from an economic perspective, we have the cap call at that we've put on that protects us economically to about to $120 a share.
Speaker Change: After that it will become somewhat dilutive.
Speaker Change: Economically, but you know.
Speaker Change: Obviously, we're thrilled that we're going to.
Speaker Change: It looks like we might be at the 120 today prices to stay where it is but we're sitting tight from our perspective for two more years until we kind of kind of.
Speaker Change: Decided at that point, whether we want to force a conversion or not.
Speaker Change: Right. Thanks, Todd and just maybe if I could sneak one last one in just.
Speaker Change:
Are we do we have a comfortable level of cash on the balance sheet just given how.
Speaker Change: Fast the business is growing capex needs, just just kind of your feeling of comfort level with the cash you have in the balance sheet now.
Speaker Change: I feel I feel really good absolutely we got plenty of cash for this year I think there is a very good chance.
You know we have a good chance of having enough cash for next year and then obviously, we think we're going to be free cash flow positive in 2006 and look based on the amount of EBITDA, we're driving right now if we do need a small amount of capital.
Speaker Change: And 25% to 26, clearly we have enough profitability to borrow that pretty effectively.
Speaker Change: Great. Thanks, guys.
Speaker Change: Thank you. Our next question is from the line of Robert Moskow with TD Cowen. Please proceed with your question.
Hey, Thanks for the question.
Robert Bain Moskow: I think I've asked this question in a different way last quarter, but I'm going to try to try to do it. This way this time.
Speaker Change: Do you have any.
Robert Bain Moskow: Any data on on what progress you're making on shifting your mix to main meal versus toppers.
Said, 48%.
Robert Bain Moskow: Does that demonstrated any progress and then if you fast forward a few years from now.
Robert Bain Moskow: What does success look like does it have to be significantly higher.
<unk> 2008 2027 goals are.
Robert Bain Moskow: Hi.
Robert Bain Moskow: To what extent does it matter.
Robert Bain Moskow: So hey, Rob So let me start with.
Rob: The way here's what we're seeing in the business right. So from a penetration standpoint, we are.
Rob: Very consistent on the penetrating penetration grows that we're consistently seeing and the people that we're building. The most with are outpacing our basically those super heavy heavy or the people that we referred to as the hippos right.
Rob: So that means that that those that naturally basically pushing by rate that group is really the one who pushes the buy rate forward. So the way we are basically planning. The majority of this is it's going to be a penetration focus, but we want to make sure that the.
Rob: Within that penetration piece, we're getting a lot of those super heavy and heavy households, theyre coming in and pushing the buy rate forward. We definitely have some expansion in buy rate. We're consistently seeing that and then we have so many data points now that are starting to show where people are not just buying ones theyre buying twos and now they're starting to buy six packs like we're looking at like where.
People are buying bulk packs of our products and I think that clearly speaks to this ideology of this is not a tougher. This is something that is a main meal for my dog. This is a replacement so you've got the Super heavy heavy staff, you've got everything that we're doing around selling multipack and youre going to see more and more of these multi packs come out there.
Rob: And we feel like that answers like that demonstrates to consumers and it really answers.
Rob: Any questions that we have around how this is not a top of it as a main meal.
Rob: Okay.
Speaker Change: Okay, Scott that explains the marketing, but like I guess my question is.
Speaker Change: Quantifiably does it does that number have to go higher to hit your 2027 goals or could you get there without it going huh.
Scott James Morris: Rob we look at this pretty closely because ultimately if you're going to drive 25% growth in a simplistic form portion of it's going to come from penetration a portion of it is going to come from by rate.
Scott James Morris: And we think the model works is low 20% growth on the penetration that gets us to our 20 million households, and you have to have call. It low to mid single digits growth in the buy rate in order for that to work. So the sum of those two should be $25, 26% kind of number and the mix is not particularly important obviously you want.
Scott James Morris: Have some of both but we wanted to really to be led by household penetration being in the low to mid Twenty's. That's the range that were looking for so the direct answer to your question is you do need to see buying rate continued to grow but it needs to grow at a low to mid single digits.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Michael elaborate with Piper Sandler. Please proceed with your question.
Michael Lavery: Thank you and good morning.
So just wanted to come back to some of the new technologies, you've touched on and.
Michael Lavery: I understand that they are in process and you probably don't want to be too specific but can you just help us understand is it more what would it be retrofitting equipment or replacing it or is it like a software upgrade that can increase speeds or maybe just some way to have it in our heads.
Michael Lavery: The right way and then a little bit of a sense of the magnitude of cost and is that already contemplated in things like essentially.
Michael Lavery: The timing could be as soon as this year, but would it be in this year's Capex. How do we think about just where it fits from a magnitude and timing of cost piece of that as well.
Speaker Change: So Michael I'll handle the first part and either Todd or ability can touch on the second part from a capital standpoint. So the very first thing that we're doing in the <unk>.
Speaker Change: Single biggest focus is to optimize the current manufacturing footprint that we have in the lines that we have and there is a lots of opportunity there and we can see.
Speaker Change: Within the results that we're showing in this quarter and that we have planned over the next 12 to 18 months, you'll continue to see really nice progress in that area secondarily there are small.
Speaker Change: Small retrofit to existing lines that we have and where we've done a lot enough work on where we know that they can be increased productivity and throughput levels on those lines and then third there is a next generation of technology that we've touched on.
Speaker Change: We are 100% confident is going to work. It's just a question of when and and we and I'll.
Speaker Change: I'll turn it over to Todd from a capital standpoint, but we.
Todd: We're basically going to work this out over the over the next kind of periods of time here in the not distant future, where we'll look at what's happening on the throughput we're getting and then the new technologies and we will layer these things and at the appropriate level, but we have budgeted this very very conservatively two so.
Todd: So from a capex perspective is.
Todd: This new technology as you know will be the seventh line that we have on the Bethlehem campus.
Todd: We believe it will be ready to start producing products.
Todd: Sometime in the first half of 2025, it absolutely we're spending money on it now it's absolutely part of the $210 million capital guidance, we've given the year a big chunk of the spend on this new technology will be this year there'll be some in next year as well, but a good chunk of it is this year as we look.
Todd: Forward and if it proves to be successful.
Todd: We will use this technology on new.
Todd: New lines in places like and as we build out that capacity and then potentially depending on how big of a margin improvement.
Todd: With astute technology, we will look at potentially.
Todd: Retrofitting existing lines as well, but that's kind of a TBD.
Speaker Change: I just want to amplify that we view manufacturing as a core competency for us and a significant competitive advantage and so both Scott and Todd referenced a significant investment in a new technology, but as Scott indicated there are other pieces to that are less significant than the seventh line in Bethlehem that we're implementing as we go along.
Speaker Change: The ultimate goal of all of this though is to end up in a situation, where we're delivering a significant improvement in return on invested capital for our shareholders and we're also delivering improvements in the quality that the consumer gets and we think if we do those things well it will be very very difficult for somebody to match, our execution and our capability.
Speaker Change: Okay, that's great color and just a quick follow up on the commodity color.
Speaker Change: You had I think about it almost a 400 basis point benefit there.
Speaker Change: Anything in particular, driving that and I think that the chicken processing plant in N S.
Speaker Change: Not only is going to get more favorable as volumes build but I think has pricing that's a little bit more stable. So it would be.
Speaker Change: It would be right to think chicken isn't a big swing factor, there or is that favorable as well.
Speaker Change: Yes, so obviously as we talked about on the call back in February we do have some deflation. We're about 75% covered now. So you know obviously, we've got a risk and opportunity for about a quarter of our input costs at this point, but we feel very good about where we are from an input cost perspective, you mentioned.
Speaker Change: Chicken processing, it's going really really well I mean, it was a headwind last year.
Speaker Change: As we were as we brought it up is there just was not enough.
Speaker Change: I am going through that facility by design.
Speaker Change: And this grows in volume over time, but with NSP being close to 25% of our.
Speaker Change: Capacity this year, it's starting to the economics of that are improving.
Speaker Change: Greatly this year and they will continue to improve over the next couple of years, we obviously yield.
Speaker Change: In his comments.
Mentioned, what a fantastic start to the year, we've had and yield all the OE projects, we have particularly in Bethlehem and also and this has.
Speaker Change: Have been tremendous our kitchen South facility is operating really really well right now were could not be more pleased with what's going on there and then we obviously had some a little bit of pricing.
Speaker Change: In Q1 that has benefited the last piece of that that does not.
Speaker Change: Persist for the remainder of the years, but those are the components of it.
Speaker Change: Okay, great. Thanks, so much.
Speaker Change: Thank you our final question for today comes from the line of Jon Andersen with William Blair. Please proceed with your questions.
Jon Robert Andersen: Hey, good morning. Thanks for the question Might've thought I have a two parter on media.
I think you mentioned in the prepared remarks that media was about 14% of.
Jon Robert Andersen: Sales in the quarter can you remind us what your kind of plan for the year is and talk a little bit about the cadence there and then.
Jon Robert Andersen:
I think I also heard maybe Billy mentioned that the customer acquisition costs have improved.
Jon Robert Andersen: Late.
Jon Robert Andersen: Could you discuss a little bit how volatile that cap figure is has been in the past and perhaps why you think youre seeing you know Curt improvement. Thanks.
Speaker Change: I'll start off and I'll, let Scott talk about the CAC.
Scott James Morris: It's about 14% of net sales this year.
Scott James Morris: Grew about 23, 24% year over year at 5% of net is down year over year. So we are starting to get a little bit of.
Scott James Morris: Leverage.
Scott James Morris: In the P&L from media, our expectation is it will grow relatively with sales for the full year. So you know that last year was around 11%, we think it'll be approximately 11% or slightly less this year as we've talked about.
Scott James Morris: If volume is too strong we will potentially look at pulling back a little bit of media spend at four things off a bit and we continue to monitor that very very closely from a cadence perspective.
Scott James Morris: <unk> spend fairly heavily in Q2, but from first half second half.
Scott James Morris: There'll be a little bit more balanced than we normally have so more in the first half of it less as a percentages than we've historically had ill, let Scott talk about the CAC, yeah, I'll start by saying when we plan. This out over many years, we did not we did not anticipate that we would be able to keep.
Scott James Morris: As stable as it has been it's been really it's been pretty amazing to be able to like years and years and have a similar tack level typically the deeper you get into your your Tam Your total addressable market typically the higher your cash go off now it's.
Scott James Morris: And even start talking about CAC from a packaged goods organizations, a little bit unusual, but we do think about it that way and track it that way. So we're getting further and further into our theoretical Tam, which we watch and continues to expand a little bit every year also we see our CAC being incredibly stable. The only time, we really saw volatility in our CAC, it's been very range bound.
Scott James Morris: The only time, we really pushed towards the top top of the range and stayed there for a bit was doing like kind of the unwinding of COVID-19 and along with the really significant price increases that we've put through.
It took a while for that to settle consumers to get comfortable and then for the capital return kind of into those normal levels no. One piece on that but I think is helpful.
Scott James Morris: When we look at not only the communication and the advertising the performance is extraordinary on a creative but the other pieces on the media planning piece. There is incredible work that goes into that and we continue to press into some new areas and some people I have people come and go Oh I saw one of your answer the first time you were on golf.
Scott James Morris: Or you were on some type of sports.
We continue to kind of press into these new areas and we're actually seeing and some of them better performance than we have in existing areas, which leads us to believe that as we continue to expand into these new new media channels.
Scott James Morris: Using some of these new techniques and even technologies that we have a really nice runway ahead of us to continue to keep cash within that range.
Speaker Change: And let me just add to that John is one of the things that we've seen is as we have grown the vin.
Speaker Change: Visibility of our retail presence, meaning second fridges larger fridges and cap fridges and whatnot. It does.
Speaker Change: Help with the efficiency of the media, meaning advertising that youre spending against a business that has a very high level of retail visibility is much more efficient than if we were spending the media against small fridges in the middle of the aisle and so the significant improvement in the second and third fridges and end caps and fridge islands and some retailers.
Speaker Change: Is helping maintain that CAC and a very very effective.
Speaker Change: Efficient level.
Speaker Change: Great. Thank you.
Speaker Change: Thank you at this time I will turn the floor back to further.
Speaker Change: Fox from management.
Fox: Great. Thank you I'll leave you with one thought this is from an unknown author, but if you want the best seat in the house, you'll have to move the dog to which I would add all you have to do is make a move for the fridge for fresh pet is cat and the dog will gladly vacate the seat. Thank you very much for your interest.
Speaker Change: This will conclude today's conference you may now disconnect. Your lines at this time I would thank you for your participation.